-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UPtn+LXgwEQRoeZleoQRvi7p0DIQfv8RwOq+CV31i1SCuWiVF4deu1q/NxTt/whb GM48FBJyBEo0Zt0fuyjCcQ== 0000950133-97-002418.txt : 19970704 0000950133-97-002418.hdr.sgml : 19970704 ACCESSION NUMBER: 0000950133-97-002418 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19970703 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETWORK SOLUTIONS INC /DE/ CENTRAL INDEX KEY: 0001030341 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 521146119 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30705 FILM NUMBER: 97635875 BUSINESS ADDRESS: STREET 1: 505 HUNTMAR PARK DR CITY: HERNDON STATE: VA ZIP: 20170 BUSINESS PHONE: 7037420400 MAIL ADDRESS: STREET 1: 505 HUNTMAR PARK DRIVE CITY: HERNDON STATE: VA ZIP: 20170 S-1 1 NETWORK SOLUTIONS FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1997 REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ NETWORK SOLUTIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 7379 52-1146119 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of Classification Code Number) Identification No.) incorporation or organization)
505 HUNTMAR PARK DRIVE, HERNDON, VIRGINIA 20170 (703) 742-0400 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------ GABRIEL A. BATTISTA Chief Executive Officer Network Solutions, Inc. 505 Huntmar Park Drive, Herndon, Virginia 20170 (703) 742-0400 (Name, address, including zip code, and telephone number, including area code, of agent for service of process) ------------------------ Copies to: JORGE DEL CALVO, ESQ. DOUGLAS E. SCOTT, ESQ. MICHAEL D. NATHAN, ESQ. KEITH J. MENDELSON, ESQ. ALOMA H. AVERY, ESQ. SIMPSON THACHER & DAVINA K. KAILE, ESQ. SCIENCE APPLICATIONS BARTLETT PILLSBURY MADISON & INTERNATIONAL 425 Lexington Avenue SUTRO LLP CORPORATION New York, NY 10017 2700 Sand Hill Road 10260 Campus Point Drive (212) 455-2000 Menlo Park, CA 94025 San Diego, CA 92121 (415) 233-4500 (619) 546-6000
------------------------ Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement numbers of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE ===================================================================================================== PROPOSED CLASS OF SECURITIES MAXIMUM AGGREGATE AMOUNT OF TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE - ----------------------------------------------------------------------------------------------------- Class A Common Stock, $0.001 par value............... $35,000,000 $10,606 =====================================================================================================
(1) Estimated solely for the purpose of computing the registration fee. The estimate is made pursuant to Rule 457(o) of the Securities Act of 1933, as amended. ------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED JULY 3, 1997 PROSPECTUS SHARES NETWORK SOLUTIONS, INC. [LOGO] CLASS A COMMON STOCK All of the shares of Class A Common Stock offered hereby are being sold by Network Solutions, Inc. ("NSI" or the "Company"). The Company has two classes of authorized Common Stock, Class A Common Stock and Class B Common Stock. Holders of Class A Common Stock generally have identical rights to holders of Class B Common Stock, except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters submitted to a vote of stockholders. See "Relationship with SAIC and Certain Transactions" and "Description of Capital Stock." The Company is a wholly-owned subsidiary of Science Applications International Corporation, a Delaware corporation ("SAIC"). Upon completion of this offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full) and will continue to control the Company. See "Principal Stockholders" and "Relationship with SAIC and Certain Transactions." Prior to this offering, there has been no public market for the Class A Common Stock of the Company. It is currently estimated that the initial public offering price will be between $ and $ per share. See "Underwriting" for a discussion of the factors to be considered in determining the initial public offering price. The Company has applied to have the Class A Common Stock approved for quotation on the Nasdaq National Market under the symbol NSOL. ------------------ THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. =========================================================================================================== PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - ----------------------------------------------------------------------------------------------------------- Per Share............................ $ $ $ - ----------------------------------------------------------------------------------------------------------- Total(3)............................. $ $ $ ===========================================================================================================
(1) See "Underwriting" for indemnification arrangements with the several Underwriters. (2) Before deducting expenses payable by the Company estimated at $ . (3) The Company has granted to the Underwriters a 30-day option to purchase up to additional shares of Class A Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are offered by the several Underwriters subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares will be available for delivery on or about , 1997, at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST J.P. MORGAN & CO. PAINEWEBBER INCORPORATED , 1997 3 [INSIDE FRONT COVER OF PROSPECTUS] [ARTWORK] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." The Company's name and logo are service marks of the Company. This Prospectus also includes trademarks of companies other than the Company. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. Unless the context requires otherwise, all references to the "Company," "Network Solutions" and "NSI" shall refer to Network Solutions, Inc., a Delaware corporation, and its predecessor, Network Solutions Incorporated, a Washington, D.C. corporation. The Class A Common Stock offered hereby involves a high degree of risk. See "Risk Factors." References in this Prospectus to the "Common Stock" shall include both the Company's Class A Common Stock, par value $0.001 per share, and the Company's Class B Common Stock, par value $0.001 per share. As used herein, net registrations are defined as the gross number of domain name registrations less management's estimates of uncollectible registrations and of non-renewals. THE COMPANY Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov top-level domains ("TLDs"). By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. Net registrations within the TLDs maintained by the Company increased by 233% from approximately 246,000 domain names registered at March 31, 1996 to approximately 818,000 domain names registered at March 31, 1997. The Company believes that commercial enterprises and individual Internet users worldwide are increasingly recognizing the .com TLD as a desirable address for commercial presence on the Internet. Net registrations in the .com TLD increased from approximately 217,000 at March 31, 1996 to approximately 721,000 at March 31, 1997, representing 88% of the Company's total net registrations at March 31, 1997. With over 10 million businesses and over 750,000 active trademarks and service marks in the United States alone, the Company believes that the potential for continued growth of domain name registrations by commercial entities and services related to those registrations is substantial. Net revenue from Internet domain name registration subscriptions accounted for 76.5% of the Company's net revenue for the three months ended March 31, 1997. The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from $3 billion in 1996. Net revenue from Intranet services accounted for 23.5% of the Company's net revenue for the three months ended March 31, 1997. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs pursuant to a cooperative agreement (the "Cooperative Agreement") with the National Science Foundation (the "NSF"). Prior to September 14, 1995, the Cooperative Agreement was a cost reimbursement plus fixed-fee contract and the Company was paid directly by the NSF for providing registration services. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to charge customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. Pursuant to the Cooperative Agreement, the Company presently is required to set aside 30% of the subscription fees collected for the enhancement of the intellectual infrastructure of the Internet. These funds are not recognized as revenue by the Company and will be disbursed in a manner approved by the NSF. The Cooperative Agreement by its terms expires in March 1998, but may be terminated at any time by the NSF at its discretion or by mutual agreement. The NSF has stated that the Cooperative Agreement will 3 5 not be re-awarded to the Company or awarded to any other entity. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Recommendations and Proposals to Increase Competition in Registration Services" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." The Company believes that it has certain competitive advantages in the domain name registration business, including: (i) brand recognition of the .com TLD; (ii) a large established customer base; (iii) strategic agreements with Internet access providers; (iv) an established technical infrastructure; (v) experience in the administration of a domain name dispute policy; and (vi) skilled technical personnel who are experienced in the domain name registration business. The Company believes that the technical and procedural requirements to build and to operate a competitive domain name registry are significant. Substantial portions of the Company's registration software have been custom- developed and are proprietary. The Company's in-house registration software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. In connection with the Company's domain name registration service, the Company: (i) cooperates with government and nonprofit organizations that develop and implement Internet standards and policies; (ii) provides customer service support, which includes back office capability, a telephone help desk and electronic support via e-mail and the World Wide Web; and (iii) disseminates domain name database information to root servers throughout the world. The Company is working to expand its domain name registration business and to continue to improve the registration process by: (i) increasing the brand recognition of the .com TLD worldwide; (ii) expanding its relationships with Internet access providers by offering enhanced registration services to their customers; (iii) stimulating demand for domain names in targeted customer segments; (iv) working with major platform providers to embed the registration function into server software applications; (v) facilitating ease of use and access to registration services; and (vi) establishing international alliances and developing multilingual capability. In addition, the Company intends to develop a portfolio of Internet enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that the Company collects. The Company was incorporated in Washington, D.C. in 1979 as Network Solutions Incorporated and was reincorporated as Network Solutions, Inc. in Delaware in November 1996. The Company's principal executive offices are located at 505 Huntmar Park Drive, Herndon, Virginia 20170, and its telephone number is (703) 742-0400. 4 6 THE OFFERING Class A Common Stock offered by the Company...... shares Common Stock to be outstanding after the offering Class A Common Stock........................... shares(1) Class B Common Stock........................... shares(2) Voting Rights.................................... The holders of Class A Common Stock, par value $0.001 per share (the "Class A Common Stock"), generally have rights, including as to dividends, identical to those of holders of Class B Common Stock, par value $0.001 per share (the "Class B Common Stock"), except that holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of Class A Common Stock and Class B Common Stock generally vote together as a single class. See "Description of Capital Stock -- Common Stock -- Voting Rights." Use of proceeds.................................. For working capital and general corporate purposes Proposed Nasdaq National Market symbol........... NSOL
- ------------------------------ (1) Excludes 2,556,250 shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, of which 1,496,725 shares were subject to options outstanding as of June 30, 1997, with a weighted average exercise price of $13.15 per share. See "Capitalization" and "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of Notes to Financial Statements. (2) Upon completion of the offering, SAIC will own 100% of the Class B Common Stock. SUMMARY FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------- ---------------- 1992 1993 1994 1995(1) 1996 1996 1997 ------ ------ ------ ------- ------- ------- ------ STATEMENT OF OPERATIONS DATA: Net revenue........................ $1,160 $4,369 $5,029 $ 6,486 $18,862 $ 2,333 $8,655 Income (loss) from continuing operations...................... 93 (110) 189 (1,434) (1,625) (1,102) 516 Net income (loss).................. $ 681 $ (386) $ (980) $(2,837) $(1,625) $(1,102) $ 516 Pro forma net income (loss) per share........................... $ $ $ Pro forma shares used in computing income (loss) per share(2)...... OTHER OPERATING DATA(3): Net new registrations.............. -- 13 24 141 489 75 197 Less: registrations not renewed.... -- -- -- 1 39 6 6 Net registrations at period end.... -- 13 37 177 627 246 818
5 7
MARCH 31, 1997 ------------------------- ACTUAL AS ADJUSTED(4) ------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................................ $12,483 $ Working capital(5)............................................... 4,637 Total assets(6).................................................. 66,850 Deferred revenue, net............................................ 36,900 Capital lease obligations........................................ 1,138 Total stockholders' equity....................................... 1,953
SUMMARY QUARTERLY FINANCIAL AND OPERATING INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
QUARTER ENDED --------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1996 1996 1996 1996 1997 1997 -------- -------- -------- --------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenue.............. $1,533 $ 2,333 $4,496 $ 5,180 $6,853 $8,655 $ Income (loss) from continuing operations............ (844) (1,102) (356) (293) 126 516 Net income (loss)........ $ (851) $(1,102) $ (356) $ (293) $ 126 $ 516 $ Pro forma net income (loss) per share...... $ $ $ $ $ $ Pro forma shares used in computing income (loss) per share(2)... OTHER OPERATING DATA(3): Net new registrations.... 43 75 105 139 170 197 Less: registrations not renewed............... 1 6 11 18 4 6 Net registrations as of period end............ 177 246 340 461 627 818
- ------------------------------ (1) The Summary Financial Data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995 which, respectively, are periods before and after the date of the SAIC acquisition discussed below. The data for these two periods were prepared on differing bases of accounting and, accordingly, the comparability of such data with other periods is limited, primarily as a result of goodwill amortization, new corporate services agreements and the repayment of outstanding debt balances. See Note 1 of Notes to Financial Statements for a discussion of the presentation for each of these periods. (2) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing pro forma net income (loss) per share. (3) Net new registrations for each period include gross new registrations less an estimate of registrations that are uncollectible. Net registrations include net new registrations less management's estimate of registrations not renewed. Prior to September 14, 1995, net registrations equaled gross registrations because the Company was reimbursed by the NSF for all registrations under a cost plus fixed-fee contract. (4) As adjusted to give effect to the $ dividend to SAIC and to reflect the sale of shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and the receipt of the estimated net proceeds therefrom. See "Use of Proceeds," "Dividend Policy" and "Capitalization." (5) Working capital calculation includes $25,345 of current deferred revenue at March 31, 1997. (6) Total assets include $23,813 of restricted assets at March 31, 1997. See Notes 2 and 3 of Notes to Financial Statements. ------------------------------ Except as otherwise noted, all information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock," "Underwriting" and Notes to Financial Statements. 6 8 RELATIONSHIP WITH SAIC AND FINANCIAL PRESENTATION The Company was acquired by Science Applications International Corporation ("SAIC"), an employee-owned, diversified professional and technical services company, on March 10, 1995. The financial statements of the Company presented for periods subsequent to March 10, 1995 are presented on the new basis of accounting arising from the SAIC acquisition. The Company is currently a wholly- owned subsidiary of SAIC. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full) and approximately % of the combined voting power of the Company's outstanding Common Stock (approximately % if the Underwriters' over-allotment option is exercised in full). As a result, SAIC will continue to have the ability to elect all of the directors of the Company and otherwise exercise control over the business and affairs of the Company. See "Principal Stockholders," "Risk Factors -- Control By SAIC," "-- Potential Conflicts of Interest" and "Relationship with SAIC and Certain Transactions." Upon completion of the offering, SAIC will continue to provide certain services to the Company in a manner generally consistent with past practices. Prior to completion of the offering, the Company and SAIC will enter into a number of intercompany agreements with respect to such services and other matters, including a tax sharing agreement. See "Risk Factors -- Intercompany Agreements Not Subject to Arm's-Length Negotiations," and "Relationship With SAIC and Certain Transactions." Prior to the acquisition of the Company by SAIC, the Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based in part on the Company's then minority-owned status were transferred into a separately-owned entity immediately prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. The operating results of both the minority-based government contracts business and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. 7 9 RISK FACTORS An investment in the shares of Class A Common Stock offered hereby involves a high degree of risk. Prospective investors should consider carefully the following risk factors, in addition to the other information presented in this Prospectus, before purchasing the shares of Class A Common Stock offered hereby. This Prospectus contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Risk Factors" and elsewhere in this Prospectus. Limited Operating History. While the Company has been in business since 1979, it has been involved in the domain name registration business pursuant to the Cooperative Agreement since 1993. Further, prior to September 14, 1995, the Company operated its domain name registration business under a cost reimbursement plus fixed-fee contract with the NSF and the Company was paid directly by the NSF for providing registration services. Accordingly, the Company has only a limited operating history under its current subscription-based pricing model for its domain name registration business, upon which an evaluation of the Company and its prospects can be based. The Company's prospects must be considered in light of the risks frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, increase its sales and marketing organization, continue to identify, attract, retain and motivate qualified persons and continue to upgrade its technologies and commercialize products and services incorporating such technologies. While the Company has been involved in network services and consulting since its inception, due to the rapidly evolving nature of Internet technologies, the Company's Intranet services business faces similar risks. There can be no assurance that the Company will be successful in addressing such risks or that the Company will continue to obtain new registrations at current rates or renew the registration of a significant portion of its customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "-- Absence of Sales and Marketing Experience; Evolving Distribution Channels." As a result of the Company's limited operating history, especially with regard to its subscription-based registration services business, the Company does not have significant historical financial data on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenue and to a large extent are fixed. As a result, quarterly sales and operating results generally depend on the volume of and ability to fulfill registration requests, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of demand for the Company's services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, the Company expects a significant increase in its operating expenses as it funds greater levels of product and services development, increases its sales and marketing operations, upgrades systems and infrastructure, opens new offices, develops new distribution channels and broadens its customer support capabilities. To the extent that such expenses precede or are not subsequently followed by an increase in revenue, the Company's business, operating results and financial condition will be materially and adversely affected. Uncertain Status of the Cooperative Agreement. In 1993, the Company entered into the Cooperative Agreement with the NSF to act as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. With the commercialization of the Internet, the role, if any, that the NSF will play in the future of the Internet and the legal authority underlying any such continuing role are at present unclear. Withdrawal of the NSF's sponsorship of the Company's activities could create a public perception that the Company lacks authority to continue in its role as registrar or to charge fees for its domain name registration services. The impact, if any, of any such public perception is unknown but could materially and adversely affect the Company's business, financial condition and results of operations. Further, the Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The Cooperative 8 10 Agreement is subject to review by the NSF and may be terminated by the NSF at any time at its discretion or by mutual agreement. If the Cooperative Agreement (or the Company's status as the exclusive registrar for domain names in the .com TLD) is terminated, the Company's business, financial condition and results of operations could be materially and adversely affected. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. However, there can be no assurance that the NSF will not award the Cooperative Agreement to another entity and, if the Cooperative Agreement is awarded to another entity, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- Relationship with the NSF; Recent Developments in the Internet Community." Competition in Domain Name Registration Business. The Company currently is the exclusive registrar for second level domain names in the .com, .org, .net, .edu and .gov TLDs. Multiple registries do not currently register names in the same TLD, but this may change in the future. The Company currently faces competition in the domain name registration business from registries for country codes, third level domain name providers such as Internet access providers and registries of TLDs other than those TLDs currently being registered by the Company. A number of entities have already begun to offer competing registration services using other TLDs. Future competition in the Company's domain name registration business could come from many different companies, including, but not limited to, major telecommunications firms, cable companies and Internet access providers. Such entities have core capabilities to deliver registration services, such as help desks, billing services and network management, along with strong name recognition and Internet industry experience. Other companies with some or all of these capabilities may also enter the registration business. Also emerging are a growing contingent of domain name resellers. The Company's position as the leading registrar of domain names could be materially and adversely affected by the emergence of any of the foregoing competitors and potential competitors, many of which have longer operating histories and significantly greater financial, technical, marketing, distribution and other resources and name recognition than the Company. In addition, the Company's revenues and fees could be reduced due to increasing competition. For example, if other entities are allowed to share the registration of domain names, these entities may bundle domain name registrations with other products or services, effectively providing such registration services for free. If operational and administrative arrangements and technology permitting multiple competitors to register domain names in the same TLDs are developed and competition occurs within the Company's existing TLDs, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- Competition." Recommendations and Proposals to Increase Competition in Registration Services. The Cooperative Agreement does not prohibit the establishment of competing registries by entities other than the Company or the NSF. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and the Internet currently operates under a system of mutual cooperation. Various governmental, technical and Internet groups are currently discussing how the award and administration of future contracts for registration services in the .com TLD, other existing TLDs and new TLDs may take place and are considering whether and how to enable other parties to enter the domain name registration business. The Company is also an active participant in this process. A consensus regarding such issues could be reached and implemented in the near future and prior to the expiration of the Cooperative Agreement. For example, some members of the Internet community have discussed various concepts such as adding new TLDs which could result in significant competition for domain name registrations, including competition on the price charged by the Company for domain name registrations. In February 1997, an international ad hoc committee (the "IAHC"), the members of which have been selected by certain entities involved in the Internet and intellectual property fields, issued its recommendation designed to increase competition in domain name registration in which it proposed the creation of additional registries, additional TLDs and the possible sharing of new and existing TLDs. In April 1997, the IAHC issued a Memorandum of Understanding ("MOU") seeking support for its recommendations. This MOU has been signed by a number of organizations in the Internet community. In April 1997, the Company issued its own recommendations to increase competition in domain name registration. The Company's recommendations focus on creating addi- 9 11 tional TLDs as well as on the future administration and technical operation of the Internet. Other groups or entities may also make other proposals concerning these and other issues. Implementation of additional TLDs, the sharing of the Company's TLDs or other recommendations or proposals of these groups could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Government Regulation and Legal Uncertainties" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." Competition in Intranet Services and Internet-Enabling Businesses. Companies with Internet expertise are current or potential competitors to the Company's Intranet services business. An Intranet is an internal network which uses Internet technologies. Such companies include systems integrators and consulting firms, such as Andersen Consulting, IBM Global Services and International Network Services. The Company also competes with certain companies that have developed products that automate the management of Internet Protocol ("IP") addresses and name maps throughout enterprise-wide Intranets, and with companies with internally-developed systems integration efforts. An IP address allows a router, a computer which connects networks together, to determine to which network the router should send the data it receives. A number of these competitors and potential competitors have longer operating histories and significantly greater financial, technical, marketing, distribution and other resources and name recognition than the Company. There can be no assurance that the Company will be able to successfully compete in the Intranet services area. Failure by the Company to compete successfully in the Intranet services area could have a material adverse effect on the Company's business, financial condition and results of operations. In developing and distributing future products and services for the Internet-enabling markets, the Company faces intense competition and expects to have multiple competitors for each of the products or services, if any, which it develops or sells. Many of the Company's potential competitors have longer operating histories and significantly greater financial, technical, marketing, distribution and other resources and name recognition than the Company. Furthermore, the industry in which the Company intends to compete is characterized by rapid changes and frequent product and service introductions. To the extent a competitor introduces a product or service prior to the introduction of the same or similar product or service by the Company, market acceptance of the competitor's product or service may adversely affect the Company's competitive position. See "Business -- Competition." Uncollectible Receivables; Modifications to Billing Practices. The Company was reimbursed by the NSF for providing domain name registration services prior to September 14, 1995, at which time the Company began charging its customers fees for new domain name registrations pursuant to an amendment to the Cooperative Agreement. The Company invoices customers and permits them to pay the subscription fee after the domain name is registered. The Company believes it has experienced a high level of uncollectible receivables due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. The Company's experience has been that, in contrast to other customers, such resellers have a greater tendency to default on their subscription fees. Management has established a provision for uncollectible accounts which it believes to be adequate to cover anticipated uncollectible receivables; however, actual results could differ from management's estimate and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of Notes to Financial Statements. The Company continually reviews its billing practices for modification to respond to market conditions and to implement operational improvements. Any such modification could have unanticipated consequences which could result in a material adverse effect on the Company's business, financial condition and results of operations. Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue. The Company's domain name registration services and Intranet services businesses have in the past generated substantially all of the Company's revenue from 10 12 continuing operations and are expected to continue to account for substantially all of the Company's revenue from continuing operations in the near term. The Company's future success will be highly dependent upon the continued increase in domain name registrations with the Company, renewal rates of its customers, the ability of the Company to maintain its current position both as a registrar of domain names and as the leading registrar of domain names within the .com TLD and the successful development, introduction and market acceptance of new services that address the demands of Internet users. Although the Company has experienced revenue growth in recent periods, such growth may not be sustainable and may not be indicative of future operating results. There can be no assurance that the Company will be able to successfully retain its current position in providing domain name registration services or develop or market additional services. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. The Company's future success will also be dependent on its ability to maintain and expand its Intranet services business. NationsBanc Services, Inc. ("NationsBanc"), the Company's largest Intranet services customer, accounted for 47.9% of the Company's Intranet services net revenue and 11.2% of the Company's total net revenue from continuing operations for the three months ended March 31, 1997. NationsBanc originally contracted with the Company in 1993 to provide ongoing analysis, design, implementation and support engineering for its enterprise network. The Company currently provides network design and engineering services as well as a variety of project specific services for NationsBanc. The Company's current contract with NationsBanc is a three-year contract which commenced January 1, 1997 and is a requirements contract under which the Company's services are ordered by task orders issued by NationsBanc. The NationsBanc contract may be terminated by NationsBanc at any time upon 30-days' prior written notice to the Company. During the first quarter of 1997, a number of services the Company had historically performed for NationsBanc were not renewed. The Company believes that this reflects NationsBanc's focus on increasing its internal information technology staff as well as its continued efforts to integrate information technology staff from recent acquisitions. The Company believes NationsBanc will continue to be a significant customer for its Intranet services group but less so than in previous years, both in terms of dollars and as a percentage of the Company's total net revenue. There can be no assurance that the Company will obtain any additional task orders under the NationsBanc contract or maintain or be able to expand its Intranet services business. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Technological Change and Additional Technology, Products and Services. The development of RWhois, a Company-developed, standard open protocol, and the associated technology, allows remote registration by others. The Company's efforts to standardize and proliferate RWhois as the registration standard may result in a material adverse effect on the Company's future competitive position by enabling others to establish registries more easily. RWhois is also the protocol that the Company may employ for any global directory services which the Company might offer. The successful introduction of such directory services may blur the distinction between directory services and domain name registration. Should this or another global directory service become widely proliferated, domain name registration may be subsumed into such a service. In that case, should the Company fail to secure a leadership position in providing such a global directory service or establish a system for charging for such service, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- NSI Services -- Registration Services" and "-- Other Products and Services Development." The Company's future financial success will be highly dependent upon its ability to develop and commercialize in a timely manner new technology, products and services that can be offered in conjunction with the Company's current domain name registration and Intranet services and that can meet the changing requirements of its current and future customers. The market for such technology, products and services is characterized by rapidly changing technology, evolving industry standards and frequent introductions of new Intranet and Internet-related products and services. Generally, the 11 13 successful development and commercialization of new technology, products and services involves many risks, including the identification of new Intranet and Internet-related product and service opportunities, the successful completion of the development process, and the identification, retention and hiring of appropriate research, development and technical personnel. There can be no assurance that the Company can successfully identify new service opportunities and develop and bring to market in a timely manner new technologies, products or services, or that services, products or technologies developed by others will not render the Company's services, products or technologies noncompetitive or obsolete. Failure by the Company to develop new technologies, products or services and bring them to market in a timely manner could have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on Future Growth of the Internet and Internet Infrastructure. The Company's future success is substantially dependent upon continued growth in the use of the Internet. Rapid growth in the use of and interest in the Internet is a relatively recent phenomenon and there can be no assurance that use of the Internet will continue to grow at its current pace. Even if the Internet continues to experience significant growth in the number of users and level of use, there can be no assurance that the Internet infrastructure will continue to be able to support the demands placed upon it by such growth. The Company's success and the viability of the Internet as an information medium and commercial marketplace will depend in large part upon the development of a robust infrastructure for providing Internet access and carrying Internet traffic. Failure to develop a reliable network system, or timely development of complementary products, such as high speed modems, could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Internet could lose its viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity or due to increased government regulation. The lack of Internet governance or the future imposition of restrictive governance or regulation could adversely affect the growth of the use of the Internet and have a material adverse effect on the Company's business, financial condition and results of operations. Because global commerce and on-line exchange of information on the Internet are new and evolving, it is difficult to predict with any assurance that the infrastructure or complementary products will be developed, or, if developed, that the Internet will become a viable information medium or commercial marketplace. If the use of the Internet does not continue to grow, if the necessary infrastructure or complementary products are not developed or do not effectively support growth that may occur, or if the Internet does not become a viable information medium or commercial marketplace, the Company's business, financial condition and results of operations would be materially and adversely affected. See "Business -- Industry Background." Litigation. As of June 30, 1997, the Company had received approximately 2,500 written objections to the registration and use of certain domain names. Of these, approximately 1,200 were disputes in which the Company's domain name dispute policy was involved. As of June 30, 1997, the Company had been named as a defendant in 26 lawsuits. As of such date, the Company had been dismissed as a party from 21 of the 26 lawsuits and no damages have been awarded against the Company to any plaintiff. The lawsuits have generally involved domain name disputes between trademark owners and domain name holders. The Company's domain name dispute policy seeks to take a neutral position regarding these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's federal trademark. The Company is drawn into such disputes, in part, as a result of claims by trademark owners that the Company is legally required, upon request by a trademark owner, to terminate the right the Company granted to an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their federally registered trademark. The holders of the domain name registrations in dispute have, in turn, questioned the Company's right, absent a court order, to take any action which suspends their registration or use of the domain names in question. Such litigation has resulted in, and any future litigation can be expected to result in, substantial legal and other expenses to the Company and a diversion of the efforts of the Company's personnel. 12 14 On June 27, 1997, SAIC received a Civil Investigative Demand ("CID") from the U.S. Department of Justice ("DOJ") issued in connection with an investigation to determine whether there is, has been, or may be a violation of antitrust laws under the Sherman Act relating to Internet registration products and services. The CID seeks documents and information from SAIC and the Company relating to their Internet registration business. Neither SAIC nor the Company is aware of the scope or nature of the investigation. The Company cannot predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or entered as a result of any settlement between the Company and the DOJ or private litigants. Any such relief could have a material adverse effect on the Company's business, financial condition and results of operations. On March 20, 1997, PG Media, Inc., a New York-based corporation ("PG Media"), filed a lawsuit against the Company in the United States District Court, Southern District of New York alleging that the Company had restricted access to the Internet by not adding TLDs in violation of the Sherman Act. The Company has answered the complaint, but no motions are pending and no schedule has yet been set by the court for these proceedings. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. Although the Company believes that it has meritorious defenses and intends to vigorously defend itself against such claims, a successful claim under the plaintiff's theory could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not be involved in additional litigation, investigations or other proceedings in the future. Any such proceedings, with or without merit, could be costly and time-consuming to defend, could divert management's attention and resources and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Litigation." Intellectual Property Rights. The Company's principal intellectual property consists of, and its success is dependent upon, the Company's proprietary software utilized in its registration services business and certain methodologies and technical expertise it utilizes in both the design and planned implementation of its current and future registration service and proposed Internet enabling services businesses. Some of the software and protocols used by the Company in its registration service and proposed Internet enabling services businesses are in the public domain or are otherwise available to the Company's competitors. In addition, in-depth technical knowledge and unique processes are critical to the Company's Intranet services business, in which a full range of consulting and systems integration services are offered in order to transition organizations from private, legacy networks to more scalable and efficient Intranets. The Company has no patents or registered copyrights but has several trademarks and service marks, including the Company's logo. The Company has compiled a database of information relating to customers in its registration business. While a portion of this database is available to the public, the Company believes that it has ownership rights in this database and is seeking to protect such rights. If it were determined that the Company does not have ownership rights in this database or if the Company is unable to protect such rights in this database or is required to share the database with its potential competitors, any such development would have a material adverse effect on the Company's business, financial condition and results of operations. The Company relies upon a combination of nondisclosure and other contractual arrangements with its employees and third parties and trade secret laws to protect its proprietary rights and limit the distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use of its proprietary information and take appropriate steps to enforce its intellectual property rights. Furthermore, even if these steps are 13 15 successful, there can be no assurance that others will not develop technologies that are similar or superior to the Company's proprietary technology. Although the Company believes that its services do not infringe on the intellectual property rights of others and that it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of claims alleging infringement of third party intellectual property rights. Any such claims could require the Company to spend significant sums in litigation, pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of asserted infringement. Failure by the Company to adequately protect its proprietary rights or litigation relating to intellectual property rights could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Intellectual Property Rights." Management of Growth; Dependence on Key Personnel. The Company has recently experienced growth in the number of its employees and in the scope of its operating and financial systems. This growth has resulted in an increase in responsibilities for both existing and new management personnel. In addition, the Company is currently seeking additional key marketing and business development personnel. The Company's ability to manage growth effectively will require it to successfully integrate its management team, continue to implement and improve its operational, financial and management information systems and to train, motivate, manage and retain its employees. There can be no assurance that the Company will be able to manage its expansion effectively and a failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The rapid growth of the Company's domain name registration business during 1995 and 1996 significantly exceeded the Company's back office capabilities and control infrastructure. As a result, the Company was unable to keep current in the processing, billing, collection, reconciliation and other administrative and financial functions relating to the domain name registration business. In late 1996, the Company entered into outsourcing arrangements with third parties, which, in conjunction with new invoicing procedures implemented in 1997, enabled the Company to become current in these functions. There can be no assurance that such outsourcing arrangements and procedural changes will continue to be successful in addressing the current or future needs of the Company's domain name registration business or that the Company will remain current on the various administrative and financial functions relating to the domain name registration business. In addition, growth of the Company's customer base may strain the capacity of its computers and telecommunications systems, and the Company's inability to sufficiently maintain or upgrade its systems could lead to degradation in performance or system failure. The Company's future success depends in part on the continued service of its key engineering, sales, marketing, executive and administrative personnel, and its ability to identify, hire and retain additional personnel. In addition, the future success of the Company's Intranet services will depend in large part on its ability to hire, train and retain network systems engineers who have expertise in a wide array of network and computer systems and a broad understanding of the industries the Company serves. An inability of the Company to identify, hire, train and retain a sufficient number of qualified network systems engineers could impair the Company's ability to adequately manage and complete its existing projects or to obtain new projects, which, in turn, could have a material adverse effect on the Company's business, financial condition and results of operations and could impair the Company's expansion of its business. Competition for engineering, sales, marketing and executive personnel is intense and there can be no assurance that the Company can retain existing personnel or identify, hire or retain additional qualified personnel. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Absence of Sales and Marketing Experience; Evolving Distribution Channels. The Company has limited experience in marketing and selling its services under its current subscription-based pricing model. The Company's ability to achieve revenue growth in the future will depend in large part on its ability to establish a sales and marketing organization. There can be no assurance that the Company will be able to identify, attract and retain experienced sales and marketing personnel with relevant 14 16 experience, that the cost of such personnel will not exceed the revenue generated or that the Company's sales and marketing organization will be able to successfully compete against the significantly more extensive and well-funded sales and marketing operations of the Company's current or potential competitors. In addition to establishing its direct sales channels, the Company's distribution strategy is to develop multiple distribution channels. Accordingly, the Company's ability to achieve revenue growth in the future will also depend in large part on establishing and maintaining relationships with Internet access providers and other third parties and on effectively using the Internet as a medium of distribution. There can be no assurance that the Company will be able to successfully establish its sales and marketing organization, develop third party distribution channels, develop its own capabilities to distribute services using the Internet or that any such expansion will result in an increase in revenue. Any failure by the Company to establish its sales and marketing organization, expand its distribution channels or use the Internet as a medium of distribution could materially and adversely affect the Company's business, financial condition and results of operations. Reliance on Third Parties. Reliable communications over the Internet are dependent upon Internet root servers, which serve as the equivalent of master "white pages" of the Internet. Each root server points to the servers of the Company's TLDs, as well as to the servers of the country TLDs. In this way, each root server contains a complete list of all domain names registered within such TLDs and the associated TLD servers for each domain name. When communication with a particular host within a domain name is required and the IP address of that host is not known locally, the root servers make that information available or "point" to a source of the information. Multiple root servers are required for purposes of load balancing and redundancy. Currently, there are ten operational root servers, eight of which are located in the United States and two of which are located in Europe. The Company controls only one of these root servers. The other nine root servers are maintained and controlled by independent operators on a volunteer basis. These volunteer operators may at any time, for any reason, fail to properly maintain such servers or abandon such servers. The occurrence of any such events would have a material adverse effect on the Company's business, financial condition and results of operations. Further, as no single organization or entity currently has formal authority over all aspects of the Internet, no organization or entity (including the Company) has the legal authority to direct where the root servers are to be pointed. However, the operators of the root servers have historically taken guidance from an unincorporated body referred to as the Internet Assigned Numbers Authority ("IANA"). It is possible that IANA could direct the root servers to "point to" servers other than the Company's TLD servers. In the event that the root servers were changed to exclude the information maintained by the Company, all new domain names registered by the Company since the last update of the data in the TLDs for which the Company acts as the registrar would no longer be accessible by other users of the Internet. If some, but not all, of the root servers were changed to exclude the Company's data, the multiple root servers would contain inconsistent information. The failure by any or all of the root servers to include or provide accessibility to the Company's data would materially and adversely affect the Internet and the Company's business, financial condition and results of operations. The Company's success and ability to compete are also dependent upon the relationships between the Company and Internet service providers ("ISPs") worldwide. Thus, if ISPs were to elect not to route Internet communications to or from domain names registered by the Company or if enough ISPs were to elect to provide routing to a set of accepted root servers which did not point to the Company's TLD servers, the Company's business, financial condition and results of operations would be materially and adversely affected. Government Regulation and Legal Uncertainties. The Internet historically has been loosely administered by a number of government agencies which were involved in the creation of its infrastructure, initially the Department of Defense's Advanced Research Projects Agency ("ARPA") and, more recently, the NSF. No single organization or entity (including the NSF) currently has formal 15 17 authority over all aspects of the Internet and it currently operates under a system of mutual cooperation. Since the original role of the Internet was to link computers at governmental and academic institutions to facilitate communication and research, the Internet was historically administered by entities which were involved in sponsoring research rather than by any of the traditional federal or state regulatory agencies. With the commercialization and internationalization of the Internet, the role of these entities in Internet administration has become less clear and private parties have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. The NSF, for example, has completed a two-year phased withdrawal of its funding for the Internet "backbone" and has transferred this responsibility to a group of private telecommunications carriers which are commercially funded. This lack of regulation and the legal uncertainties arising from it pose a number of risks to the Company and to the commercial Internet industry in general. The effective operation of the Internet is dependent on the continued mutual cooperation and consensus among an increasing number of entities, many of which have widely divergent interests. For example, the IP addresses allocated by ISPs to their customers are originally allocated by the IANA. Thus, the effective operation of the Internet is dependent on such continued allocation of IP addresses by IANA. Continuing to achieve consensus may become difficult or impossible and may become extremely time-consuming and costly. Achieving consensus may be made more difficult because of the lack of leadership by any one entity. This lack of regulation creates great uncertainty as to the legality of any action, making business planning and operations difficult. Conversely, the lack of regulation could theoretically result in individuals and entities taking harmful or disruptive actions with respect to the Internet with impunity. There is a risk that a failure to achieve consensus among the various groups which are now informally administering the Internet could result in the disruption of Internet operations, the inability of any user to communicate with another user or otherwise utilize the Internet or the delay of infrastructure improvements necessary to the maintenance and expansion of the Internet. Any disruption to the administration, effective operation or maintenance and expansion of the Internet would have a material adverse effect on the Company's business, financial condition and results of operation. See "-- Uncertain Status of the Cooperative Agreement; "-- Recommendations and Proposals to Increase Competition in Registration Services" and "Business -- Relationship with the NSF; Recent Developments in the Internet Community." The current lack of any centralized Internet management could also cause the U.S. federal or other governments to intervene with uncertain results. The U.S. government has formed an interagency task force ("ITF") consisting of various federal agencies to study the issues surrounding domain name registration and governance of the Internet. The ITF is expected to solicit broad public input to these and other issues. This process is expected to be completed in early 1998. There can be no assurance that this process will result in policies favorable to the Company or consistent with the Company's current or future plans. The outcome of this activity, therefore, could have a material adverse effect on the Company's business, financial condition and results of operations. In the United States, apart from its obligations under the Cooperative Agreement, the Company is not currently subject to direct regulation other than federal and state regulation applicable to businesses generally. However, changes in the regulatory environment relating to the telecommunications and media industry could result in the Company being subject to direct regulation, in which case the Company's business, financial condition and results of operations could be materially and adversely affected. The Company is aware of certain industry requests of the Federal Communications Commission (the "FCC") to review the impact of Internet usage on the U.S. telecommunications service providers, in particular, the generally lower cost structure for data transmission versus voice. FCC regulatory review and rulemaking could result in regulation of the Internet industry, changes in current rules governing telecommunications or both. In addition, as Internet usage becomes more widespread internationally, there is an increased likelihood of international regulation. The Company cannot predict whether or to what extent any such new rulemaking or regulation will occur and what impact, if any, it would have on the Company's business, financial condition and results of operations. 16 18 Additionally, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, ISPs could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. The future interpretation by the courts of the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. See "-- Litigation" and "Business -- Litigation." Costs incurred or decisions rendered as a result of government investigations or lawsuits relating to any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Government Regulation and Legal Uncertainties." System Interruption and Security Risks. The Company's operations are dependent upon its ability to maintain its computer and telecommunications equipment in effective working order and to protect its systems against damage from fire, natural disaster, sabotage, power loss, telecommunication failure or similar events. The vast majority of the Company's computer and telecommunications equipment is located in a single facility. Although the Company is in the process of establishing back-up facilities at another site, this measure, when implemented, will not eliminate the significant risk to the Company's operations from a natural disaster or system failure at its principal site. Despite the implementation of security measures, the Company's infrastructure may also be vulnerable to computer viruses, hackers or similar disruptive problems caused by its customers or other Internet users. Computer break-ins and other disruptions may jeopardize the security of information stored in and transmitted through the computer systems of the Company and may deter potential customers from utilizing the Company's services. In addition, growth of the Company's customer base may put strain on the capacity of its computers and telecommunications systems and the Company's inability to sufficiently maintain or upgrade its systems could lead to degradation in performance or system failure. Any damage, failure or delay that causes significant interruptions in the Company's systems would have a material adverse effect on the Company's business, financial condition and results of operations. Potential Fluctuations in Quarterly Results. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, many of which are beyond the Company's control. Such factors may include, but are not limited to, termination of the Cooperative Agreement, the introduction of additional competing registrars or TLDs, variations in the number of requests for domain name registrations or demand for the Company's services, introduction or enhancements of services by the Company or its competitors, market acceptance of new service offerings, increased competition, costs associated with providing domain name registration services, litigation costs, patterns of growth in the use of and interest in the Internet and general economic conditions. The Company is continuing to increase its operating expenses for personnel, facilities and new services development and, if its revenues do not correspondingly increase, the Company's business, financial condition and results of operations would be materially and adversely affected. Since professional services revenue for Intranet services is recognized by the Company only when network systems engineers are engaged on client projects, the relative utilization of network systems engineers directly affects the Company's operating results. In addition, a majority of the Company's Intranet services operating expenses, particularly personnel and related costs, depreciation and rent, are substantially fixed in advance of any particular quarter. As a result, any underutilization of network systems engineers may cause significant variations in operating results in any particular quarter and could result in losses for such quarter. Termination or completion of contracts in the Company's Intranet services business or failure to obtain additional contracts in its Intranet services business could have a material adverse effect on the Company's business, financial condition and results of operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." International Operations. The Company anticipates that revenue from sources outside the U.S. may increase in the future. As a result, the Company will increasingly be subject to the risks of 17 19 conducting business internationally, including unexpected changes in regulatory requirements, fluctuations in the U.S. dollar, tariffs and other barriers and restrictions and the burdens of complying with a variety of foreign laws. In addition, the Company will increasingly be subject to general geopolitical risks, such as political and economic instability and changes in diplomatic and trade relationships, in connection with its international operations. There can be no assurance that such regulatory, geopolitical and other factors will not adversely impact the Company's operations in the future or require the Company to modify its business practice. In addition, the laws of certain foreign countries may not protect the Company's proprietary rights to the same extent as do the laws of the United States. Control by SAIC. Upon completion of this offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full) and approximately % of the combined voting power of the Company's outstanding Common Stock (approximately % if the Underwriters' over-allotment option is exercised in full). As a result, SAIC will be able to effectively control all matters requiring approval by the stockholders of the Company, including the election of members of the Company's Board of Directors, changing the size and composition of the Board of Directors and preventing a change in control of the Company. The Class B Common Stock is convertible into Class A Common Stock, subject to certain limitations set forth in the Company's Amended and Restated Certificate of Incorporation. See "Description of Capital Stock." SAIC has no agreement with the Company not to sell or distribute its shares of the Company's Common Stock and, except for the restrictions in the Underwriting Agreement set forth below, there can be no assurance that SAIC will maintain its ownership of the Company's Class B Common Stock. Pursuant to the Underwriting Agreement, SAIC has agreed, subject to certain exceptions, not to sell or otherwise dispose of, directly or indirectly, any shares of Common Stock owned by it for a period of 180 days after the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC. The Internal Revenue Code of 1986, as amended (the "Code"), requires beneficial ownership by SAIC of at least 80% of the total voting power and value of the outstanding Common Stock of the Company in order to include the Company in its consolidated group for federal income tax purposes. In addition, SAIC must beneficially own at least 80% of the total voting power and 80% of each class of nonvoting capital stock of the Company in order to be able to effect a tax-free spin-off of the Company under the Code. Because SAIC may seek to maintain its beneficial ownership percentage of the Company for tax planning purposes or otherwise and may not desire to acquire additional shares of Common Stock in connection with a future issuance of shares by the Company, the Company may be constrained in its ability to raise equity capital in the future or to issue Common Stock or other equity securities in connection with acquisitions. See "Relationship with SAIC and Certain Transactions." Control of Tax Matters; Tax and ERISA Liability. By virtue of its controlling ownership and the terms of a tax sharing agreement (the "Tax Sharing Agreement") to be entered into between the Company and SAIC, SAIC will effectively control all of the Company's tax decisions. Under the Tax Sharing Agreement, SAIC will have sole authority to respond to and conduct all tax proceedings (including tax audits) relating to the Company, to file federal, state and local returns on behalf of the Company and to calculate the amount of the Company's liability to SAIC under the Tax Sharing Agreement. Further, pursuant to the terms of the Tax Sharing Agreement, upon deconsolidation, the Company's ability to recognize a benefit for tax losses it incurs is subject to SAIC's approval. SAIC may choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to SAIC and detrimental to the Company. Each member of a consolidated group for federal income tax purposes is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. In addition, under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and federal income tax law, each member of the controlled group is jointly and severally liable for funding and termination liabilities of tax qualified defined benefit retirement plans as well as certain plan taxes. 18 20 Accordingly, during the period in which the Company is included in SAIC's consolidated or controlled group, the Company could be liable if such liability or tax is incurred, and not discharged, by any other member of SAIC's consolidated or controlled group. See "Relationship with SAIC and Certain Transactions -- Tax Sharing Agreement." Intercompany Agreements Not Subject to Arm's-Length Negotiations. Prior to the completion of the offering, SAIC and the Company will enter into certain intercompany agreements, including an agreement pursuant to which SAIC will provide various corporate services to the Company that may be material to the conduct of the Company's business (the "Corporate Services Agreement"). With respect to matters covered by the Corporate Services Agreement, the relationship between SAIC and the Company is intended to continue in a manner generally consistent with past practices. Because the Company is currently a wholly-owned subsidiary of SAIC, none of the intercompany agreements will result from arm's-length negotiations. These agreements may include terms and conditions that may be more or less favorable to the Company than terms contained in similar agreements negotiated with third parties. Further, the Corporate Services Agreement will be terminable by either party upon 180 days' prior written notice. In the event that SAIC elects to terminate the Corporate Services Agreement, there can be no assurance that the Company would be able to secure alternative sources for such services within 180 days or that such services could be obtained for costs comparable to costs to be charged by SAIC. See "Relationship with SAIC and Certain Transactions." Potential Conflicts of Interest. Various conflicts of interest between the Company and SAIC could arise following the completion of this offering, and persons serving as directors, officers and employees of both the Company and SAIC may have conflicting duties to each. Currently, Michael A. Daniels, the Company's Chairman of the Board, also serves as a Sector Vice President and Sector Manager of SAIC, Donald N. Telage, the Company's Senior Vice President, Internet Relations and Special Programs and one of the Company's directors, also serves as a Group Senior Vice President of SAIC, Robert J. Korzeniewski, the Company's Chief Financial Officer, also serves as a Corporate Vice President for Administration of SAIC, Raymond S. Corson, the Company's Senior Vice President, Business Development, also serves as a Vice President of SAIC, A. Scott Williamson, the Company's Vice President, Engineering, also serves as a Vice President of SAIC and Russell L. Helbert, the Company's Controller, also serves as an Assistant Vice President for Administration of SAIC. Further, J. Robert Beyster, a director of the Company, is also the Chief Executive Officer and Chairman of the Board of SAIC, John E. Glancy, a director of the Company, is also a Corporate Executive Vice President and a director of SAIC and William A. Roper, Jr., a director of the Company, is also Senior Vice President and Chief Financial Officer of SAIC. It is currently contemplated that, upon completion of the offering, all of the Company's executive officers who currently also hold positions with SAIC (other than Donald N. Telage) will resign from their respective positions with SAIC. Ownership interests of directors or officers of the Company in the common stock of SAIC could also create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different implications for the Company and SAIC. In addition, for financial reporting purposes, the Company's financial results will be included in SAIC's consolidated financial statements. The members of the Board of Directors of the Company and executive officers of the Company who are affiliated with SAIC will consider not only the short-term and long-term impact of financial and operating decisions on the Company, but also the impact of such decisions on SAIC's consolidated financial results. In some instances, the impact of such decisions could be disadvantageous to the Company while advantageous to SAIC. Certain Charter Provisions and Limitations on Liability. The Company's Second Amended and Restated Certificate of Incorporation (the "Amended and Restated Certificate of Incorporation") includes provisions relating to competition by SAIC with the Company, allocations of corporate opportunities, transactions with interested parties and intercompany agreements and provisions limiting the liability of certain persons. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." The enforceability under Delaware corporate law of such provisions which eliminate certain rights that might have been available to stockholders under 19 21 Delaware law had such provisions not been included has not been established and thus counsel to the Company is not able to render an opinion regarding the enforceability of such provisions. The Company's Amended and Restated Certificate of Incorporation provides that any person purchasing or acquiring an interest in shares of capital stock of the Company, including the Underwriters, shall be deemed to have consented to the provisions in the Amended and Restated Certificate of Incorporation relating to competition by SAIC with the Company, conflicts of interest, corporate opportunities and intercompany agreements, and such consent may restrict such person's ability to challenge transactions carried out in compliance with such provisions. The Company intends to disclose the existence of such provisions in its Annual Reports on Form 10-K as well as in certain other filings with the Securities and Exchange Commission (the "Commission"). The corporate charter of SAIC does not include comparable provisions and, as a result, persons who are directors and/or officers of the Company and who are also directors and/or officers of SAIC may choose to take action in reliance on such provisions rather than act in a manner that might be favorable to the Company but adverse to SAIC. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." Under the Company's Amended and Restated Certificate of Incorporation, the personal monetary liability of the directors of the Company for breach of their fiduciary duty of care, including actions involving gross negligence, is eliminated to the fullest extent permitted under Delaware law. See "Description of Capital Stock -- Certain Certificate of Incorporation and Bylaw Provisions." Shares Eligible for Future Sale. Sales of substantial amounts of Class A Common Stock in the public market, whether by purchasers in the offering or other stockholders of the Company, or the perception that such sales could occur, may materially and adversely affect the market price of the Class A Common Stock. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock, which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full). A decision by SAIC to sell such shares could materially and adversely affect the market price of the Class A Common Stock. The Company and SAIC have entered into a registration rights agreement which requires the Company to effect a registration statement covering some or all of the shares of Class A Common Stock to be owned by SAIC upon conversion of the Class B Common Stock owned by SAIC and any other shares of Class A Common Stock otherwise acquired by SAIC, subject to certain terms and conditions. The Company intends to register a total of 2,556,250 shares of Class A Common Stock reserved for issuance under its 1996 Stock Incentive Plan as soon as practicable following the date of this Prospectus. See "Relationship with SAIC and Certain Transactions -- Registration Rights Agreement," "Shares Eligible for Future Sale" and "Description of Capital Stock." In certain circumstances, including without limitation, a public offering or distribution of Class B Common Stock by SAIC, the Class B Common Stock would trade separately from the Class A Common Stock in the public market. Separate trading of the Class B Common Stock in the public market, or the perception that such trading could occur, may materially and adversely affect the market price of the Class A Common Stock. Upon completion of the offering, the shares of Class A Common Stock offered hereby will be freely tradable without restriction or further registration under the Securities Act by persons other than executive officers and directors of SAIC or the Company (the "Restricted Persons"). The shares of Common Stock which are held by SAIC and certain Restricted Persons are subject to a "lock-up" agreement under which SAIC and such Restricted Persons have agreed, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of any shares of Common Stock without the prior written consent of Hambrecht & Quist LLC, for a period of 180 days after the date of this Prospectus. Following such period, SAIC and any such Restricted Person who is an affiliate of the Company may sell such shares only pursuant to the requirements of Rule 144 under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an effective registration statement under the Securities Act. The Securities and Exchange Commission has recently enacted revisions to Rule 144 which 20 22 shortened the holding periods under Rule 144 from two years to one year and under Rule 144(k) from three years to two years. See "Shares Eligible for Future Sale" and "Underwriting." Lack of Prior Public Market and Possible Volatility of Stock Price. Prior to this offering, there has been no public market for the Company's Class A Common Stock and there can be no assurance that an active trading market will develop or be sustained after this offering. The initial public offering price will be determined through negotiations among the Company and the representatives of the Underwriters based on several factors and may not be indicative of the market price of the Class A Common Stock after this offering. See "Underwriting." The market price of the shares of Class A Common Stock is likely to be highly volatile and may be significantly affected by factors such as actual or anticipated fluctuations in the Company's results of operations, announcements of technological innovations, changes in Internet governance, announcement of additional competing registrars or TLDs, introduction of new products or services by the Company or its competitors, developments with respect to patents, copyrights or proprietary rights, conditions and trends in the networking and other technology industries, changes in or failure by the Company to meet securities analysts' expectations, general market conditions and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have particularly affected the market prices for the common stocks of technology companies. These broad market fluctuations may adversely affect the market price of the Company's Class A Common Stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Such litigation could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect upon the Company's business, financial condition and results of operations. Dilution. Based upon the initial public offering price per share of $ (and assuming no exercise of the Underwriters' over-allotment option), the Company's net tangible book value per share of Common Stock as of March 31, 1997, after giving effect to the transactions set forth in "Capitalization," would have been $ . This represents an immediate increase in net tangible book value of $ per share to the existing stockholder and an immediate dilution of $ per share to purchasers of the Class A Common Stock in the offering. See "Dilution." Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of Incorporation and Delaware Law. The holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to ten votes per share. Holders of Class A Common Stock and Class B Common Stock generally vote together as a single class. The Class B Common Stock held by SAIC is convertible into Class A Common Stock under certain conditions set forth in the Company's Amended and Restated Certificate of Incorporation. See "Description of Capital Stock." Upon completion of this offering, the Company's Board of Directors will have the authority to issue up to 10,000,000 shares of Preferred Stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights of such shares, without any further vote or action by the Company's stockholders. Such charter provisions could have the effect of delaying or preventing a change of control of the Company. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no current plans to issue shares of Preferred Stock. Further, certain provisions of the Company's Certificate of Incorporation and of Delaware law could delay or make more difficult a merger, tender offer or proxy contest involving the Company. See "Description of Capital Stock -- Preferred Stock" and "-- Delaware Antitakeover Law and Certain Charter Provisions." Discretion as to Use of Proceeds. The Company intends to use the proceeds of this offering for working capital and other general corporate purposes, including business development, marketing and promotional activities, continued development of enhancements or new services complementary to 21 23 the Company's registration business and other uses as deemed appropriate by the Board of Directors. The amounts and timing of these expenditures will vary significantly depending upon a number of factors, including the amount of cash generated by the Company's operations, the progress of the Company's product and services development activities and the market response to the introduction of any new products and services. In addition, the Company may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to the Company's current business, through mergers, acquisitions, joint ventures or otherwise. However, the Company has no specific agreements or commitments and is not currently engaged in any negotiations with respect to such transactions. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds of this offering. See "Use of Proceeds." 22 24 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share are estimated to be $ ($ if the Underwriters' over-allotment option is exercised in full). The Company intends to use the proceeds of this offering for working capital and other general corporate purposes, including business development, marketing and promotional activities, continued development of enhancements or new services complementary to the Company's registration business and other uses as deemed appropriate by the Board of Directors. The amounts and timing of these expenditures will vary significantly depending upon a number of factors, including the amount of cash generated by the Company's operations, the progress of the Company's product and services development activities and the market response to the introduction of any new products and services. In addition, the principal purposes of this offering include increasing the Company's equity capital, creating a public market for the Company's Class A Common Stock, providing liquidity for the Company's stockholders and facilitating future access by the Company to public equity markets. In addition, the Company may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to the Company's current business, through mergers, acquisitions, joint ventures or otherwise. However, the Company has no specific agreements or commitments and is not currently engaged in any negotiations with respect to such transactions. Accordingly, the Company's management will retain broad discretion as to the allocation of the net proceeds of this offering. Pending the uses described above, the Company intends to invest the net proceeds of this offering in short-term, interest-bearing investment grade securities. DIVIDEND POLICY With the exception of a $ dividend to be paid to SAIC declared on and payable on , to date, the Company has neither declared nor paid dividends on its Common Stock. Other than the dividend to be paid to SAIC, the Company currently intends to retain its earnings, if any, for future growth and does not anticipate paying any dividends in the foreseeable future. The Company's future dividend policy will be determined by its Board of Directors on the basis of various factors, including the Company's results of operations, financial condition, capital requirements and investment opportunities. 23 25 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1997: (i) on an actual basis, (ii) on a pro forma basis to give effect to the dividend paid on , 1997 to SAIC and (iii) as adjusted to give effect to the sale by the Company of the shares of Class A Common Stock offered hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom. This table should be read in conjunction with the Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
MARCH 31, 1997 -------------------------------------- ACTUAL PRO FORMA(2) AS ADJUSTED ------- ------------ ----------- (IN THOUSANDS) STOCKHOLDERS' EQUITY: Preferred Stock, $0.001 par value, 10,000,000 shares authorized; none issued and outstanding..................................... $ -- $ -- $ -- Class A Common Stock, $0.001 par value, 100,000,000 shares authorized; none issued and outstanding, actual and pro forma; issued and outstanding, as adjusted(1)................. -- -- Class B Common Stock, $0.001 par value, 40,000,000 shares authorized; 12,500,000 issued and outstanding, actual and pro forma; 12,500,000 issued and outstanding, as adjusted............. 12 Additional paid-in capital........................ 4,468 -- Accumulated deficit............................... (2,527) -- ------- -------- --------- Total stockholders' equity................... 1,953 ------- -------- --------- Total capitalization.................... $ 1,953 $ $ ======= ======== =========
- ------------------------------ (1) Excludes 2,556,250 shares of Class A Common Stock reserved for issuance under the Company's 1996 Stock Incentive Plan, of which 1,496,725 shares were subject to outstanding options as of June 30, 1997 at a weighted average exercise price of $13.15 per share. See "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of Notes to Financial Statements. (2) See Note 2 of Notes to Financial Statements. 24 26 DILUTION As of March 31, 1997, the Company had a pro forma net tangible book value before the offering of approximately $ or $ per share of Common Stock. Pro forma net tangible book value represents the amount of total tangible assets(1) of the Company less total liabilities after giving effect to the dividend to SAIC, divided by the pro forma number of shares of Common Stock outstanding. Without taking into account any other changes in the pro forma net tangible book value after March 31, 1997, other than to give effect to the receipt by the Company of the net proceeds from the sale of the shares of Class A Common Stock offered by the Company hereby at an assumed initial public offering price of $ per share and the application of the estimated net proceeds therefrom, the pro forma net tangible book value of the Company at March 31, 1997 after the offering would have been approximately $ or $ per share. This represents an immediate increase in such net tangible book value of $ per share to the existing stockholder and an immediate dilution of $ per share to new investors purchasing shares of Class A Common Stock in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share..................... $ ------ Net tangible book value per share before the offering.......... $ Decrease in net tangible book value attributable to dividend... ------ Pro forma net tangible book value per share before the offering...................................................... Increase per share attributable to new investors............... ------ Pro forma net tangible book value per share after the offering...... ------ Dilution per share to new investors............................ $ ======
The following table summarizes, on a pro forma basis, as of March 31, 1997, the differences between the existing stockholder and purchasers of shares in this offering with respect to the number of shares of Common Stock purchased from the Company, the total consideration paid by the existing stockholder for its shares based on a valuation of the shares of SAIC Class A Common Stock used to acquire the Company, the total consideration paid to the Company by the purchasers of shares in this offering and the average consideration paid per share (based upon an assumed initial public offering price of $ per share and before deduction of estimated underwriting discounts and commissions and offering expenses payable by the Company):
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholder......... % $ % $ New investors................ % % ---------- ------ ----------- ------ Total................... 100.0% $ 100.0% ========= ====== =========== ======
The foregoing table assumes no exercise of the Underwriters' over-allotment option or of any outstanding stock options. As of June 30, 1997, there were outstanding options to purchase 1,496,725 shares of Class A Common Stock, with a weighted average exercise price of $13.15 per share. To the extent that options are granted and exercised, there may be further dilution to new investors. See "Management -- 1996 Stock Incentive Plan" and Notes 10 and 14 of the Notes to Financial Statements. - ------------------------------ (1) Total tangible assets include deferred tax assets of $14,151 at March 31, 1997. 25 27 SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data of the Company for the periods indicated and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Financial Statements and the Notes related thereto included elsewhere in this Prospectus. The selected financial data for the years ended December 31, 1996 and 1994 and for the periods January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 were derived from the Company's audited financial statements included elsewhere in this Prospectus. The information for fiscal years 1992 and 1993 and the three months ended March 31, 1996 and 1997 is derived from the Company's unaudited financial statements which, in the opinion of management, reflect all adjustments (consisting only of normal recurring items) necessary to present fairly the financial position and results of operations for the periods then ended. The selected financial data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995, both as derived from the Company's audited financial statements included elsewhere in this Prospectus. Comparability of pre-acquisition periods to post-acquisition periods is limited because the financial statements have been prepared on differing bases of accounting as a result of the acquisition by SAIC. See Note 1 of Notes to Financial Statements. The accompanying financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for all periods presented for continuing operations reflect the results of operations of the commercial business of the Company, which includes registration services and Intranet services. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview -- The SAIC Acquisition" and "-- Registration Services."
THREE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------------- ------------------ 1992 1993 1994 1995(1) 1996 1996 1997 ------ ------ ------- ------- ------- ------- ------ (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net revenue........................ $1,160 $4,369 $ 5,029 $ 6,486 $18,862 $ 2,333 $8,655 Cost of revenue.................... 695 2,924 3,073 5,704 14,666 2,950 5,294 ------ ------ ------- -------- ------- ------- ------ Gross profit....................... 465 1,445 1,956 782 4,196 (617) 3,361 Research and development expenses......................... -- -- -- -- 680 -- 311 Selling, general and administrative expenses......................... 275 1,401 1,544 2,394 6,280 921 2,301 Interest expense (income).......... 42 120 109 61 (496) -- (149) ------ ------ ------- -------- ------- ------- ------ Income (loss) from continuing operations before income taxes and cumulative effect of a change in accounting principle.......... 148 (76) 303 (1,673) (2,268) (1,538) 898 Provision (benefit) for income taxes............................ 55 34 114 (239) (643) (436) 382 ------ ------ ------- -------- ------- ------- ------ Income (loss) from continuing operations....................... 93 (110) 189 (1,434) (1,625) (1,102) 516 Income (loss) from discontinued operations, net of income taxes(2)......................... 588 (936) (1,169) (1,403) -- -- -- Cumulative effect of change in accounting for income taxes...... -- 660 -- -- -- -- -- ------ ------ ------- -------- ------- ------- ------ Net income (loss).................. $ 681 $ (386) $ (980) $(2,837) $(1,625) $(1,102) $ 516 ====== ====== ======= ======== ======= ======= ====== PRO FORMA: Net income (loss) per share........ $ $ $ ======= ======= ====== Shares used in computing income (loss) per share(3).............. ======= ======= ====== OTHER OPERATING DATA(4): Net new registrations.............. -- 13 24 141 489 75 197 Less: registrations not renewed.... -- -- -- 1 39 6 6 Net registrations at period end.... -- 13 37 177 627 246 818
26 28
THREE MONTHS FISCAL YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------------------- ------------------- 1992 1993 1994 1995 1996 1996 1997 ------ ------ ------- ------- ------- ------- ------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.... $ -- $ -- $ 136 $ 5 $15,540 $ 13 $12,483 Working capital(5)........... (307) (179) (1,340) (559) 1,362 401 4,637 Total assets(6).............. 1,272 3,124 2,448 11,748 66,118 19,784 66,850 Deferred revenue, net........ 32 73 137 3,346 29,352 8,198 36,900 Long-term obligations, excluding current portion.................... 479 344 81 1,353 9,440 3,165 12,594 Total stockholders' equity... 56 1,221 252 3,062 1,437 1,960 1,953
- ------------------------------ (1) The Selected Financial Data for the year ended December 31, 1995 was derived by combining the Company's Results of Operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995, which, respectively, are periods before and after the date of the SAIC acquisition. The data for these two periods were prepared on differing bases of accounting and, accordingly, the comparability of such data with other periods is limited, primarily as a result of goodwill amortization, new corporate services agreements and the repayment of outstanding debt balances. See Note 1 of Notes to Financial Statements for a discussion of the presentation for each of these periods. (2) See Note 11 of Notes to Financial Statements for a discussion of discontinued operations. (3) See Note 2 of Notes to Financial Statements for an explanation of the determination of shares used in computing pro forma net income (loss) per share. (4) Net new registrations for each period include gross new registrations less an estimate of registrations that are uncollectible. Net registrations includes net new registrations less an estimate of registrations not renewed. Prior to September 14, 1995, net registrations equaled gross registration because the Company was reimbursed by the NSF for all registrations under a cost plus fixed-fee contract. (5) Working capital calculation includes $32, $73, $137, $1,993, $19,912, $5,033, and $25,345 of current deferred revenue as of December 31, 1992, 1993, 1994, 1995 and 1996 and March 31, 1996 and 1997, respectively. (6) Total assets include $0, $0, $0, $1,408, $17,453, $3,909 and $23,813 of restricted assets as of December 31, 1992, 1993, 1994, 1995 and 1996 and March 31, 1996 and 1997, respectively. See Notes 2 and 3 of Notes to Financial Statements. 27 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Financial Data" and the Company's Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results may differ materially from the results discussed in the forward-looking statements as a result of certain factors, including, but not limited to, those discussed in "Risk Factors" and elsewhere in this Prospectus. Unless otherwise indicated, the accompanying financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for all periods presented for continuing operations reflect the financial position and results of operations of the Company's commercial business, which includes registration services and Intranet services. OVERVIEW The SAIC Acquisition. The Company was incorporated in the District of Columbia in 1979 and was reincorporated in Delaware in 1996. The Company was acquired by SAIC on March 10, 1995 in a stock-for-stock transaction accounted for as a purchase and is currently a wholly-owned subsidiary of SAIC. Prior to the acquisition of the Company by SAIC, the Company's principal lines of business consisted of providing integration, engineering for computer and telecommunications networks for government and commercial customers and domain name registration services. The Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based in part on the Company's then minority-owned status were transferred into a separately-owned entity immediately prior to the acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. The operating results of both the minority-based government contracts business and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. The Company. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs pursuant to the Cooperative Agreement with the NSF. Net registrations (gross registrations less management's estimates of uncollectible registrations and of non-renewals) within the TLDs maintained by the Company increased by 233% from approximately 246,000 domain names registered at March 31, 1996 to approximately 818,000 domain names registered at March 31, 1997. Net registrations in the .com TLD represented 88% of the Company's total net registrations as of March 31, 1997. Net revenue from Internet domain name registration subscriptions accounted for 59.1% and 76.5% of the Company's net revenue for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. Net revenue from Intranet services accounted for 40.9% and 23.5% of the Company's net revenue for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. Registration Services. In January 1993, the Company entered into the Cooperative Agreement with the NSF under which the Company provides Internet registration services for five TLDs: .com, .org, .net, .edu and .gov. With the commercialization of the Internet, the role, if any, that the NSF will 28 30 play in the future of the Internet and the legal authority underlying any such continuing role are at present unclear. The Cooperative Agreement is subject to review by the NSF and may be terminated by the NSF at any time at its discretion or by mutual agreement. The Cooperative Agreement by its terms expires in March 1998, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. See "Risk Factors -- Limited Operating History," "-- Uncertain Status of the Cooperative Agreement," and "-- Recommendations and Proposals to Increase Competition in Registration Services." Originally, the Cooperative Agreement was structured as a cost reimbursement plus fixed-fee contract. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name in the .com, .org, .net, .edu and .gov TLDs. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. The NSF has agreed to pay the registration and renewal fees for registrations within the .edu and .gov TLDs through March 31, 1997. The Company has recently agreed with the NSF to provide registrations in the .gov and .edu TLDs free of charge from April 1, 1997 through March 31, 1998. The cost of providing these registration services is not expected to have a material adverse effect on the Company's business, financial condition or results of operations. At September 14, 1995, the Company had approximately 131,000 registered domain names that were subject to annual renewal. From September 14, 1995 through March 31, 1997, the Company had approximately 733,000 net new registrations. Under the terms of the amendment to the Cooperative Agreement, 30% of the new registration or renewal fees collected is required to be set aside to be reinvested for the enhancement of the intellectual infrastructure of the Internet and, as such, is not recognized as revenue by the Company. The Company reflects these funds along with the appropriate percentage of net accounts receivable as restricted assets and has recorded an equivalent, related current liability. The Company maintains the cash received relating to the set aside funds in a separate interest bearing account. These funds, plus any interest earned, will be disbursed in a manner approved by the NSF. At March 31, 1997, the restricted assets totaled $23.8 million. None of the restricted set aside funds have been disbursed. Future disbursements of these funds will not have an effect on the Company's business, financial condition or results of operations. The Company was reimbursed by the NSF for providing domain name registration services prior to September 14, 1995, at which time the Company began charging its customers fees for new domain name registrations pursuant to the amendment to the Cooperative Agreement. The Company began charging its customers fees for renewals of existing domain name registrations in December 1995. The Company invoices customers and permits them to pay the subscription fee after the customer's domain name is registered. The Company's experience has been that, for the period from September 1995 to March 1997, approximately 30% of registrations have ultimately been deactivated for non-payment. As a consequence, the Company has recorded a comparable provision for uncollectible accounts in determining net registration revenue. See Note 3 of Notes to Financial Statements. The Company believes that it has experienced a high level of uncollectible receivables due to, among other factors, the large number of individuals and corporations that have registered multiple domain names with the apparent intention of reselling such names at a profit. The Company's experience has been that, in contrast to other customers, such resellers have a greater tendency to default on their subscription fees. The Company believes that the new procedures implemented in 1997 regarding invoicing and prompt deactivation of delinquent customers has significantly improved timeliness of customer payments. See "Risk Factors -- Limited Operating History," "-- Uncertain Status of the Cooperative Agreement," "-- Uncollectible Receivables; Modifications to Billing Practices" and "Business -- Operations." Prior to September 14, 1995, the Company recognized revenue under the Cooperative Agreement on the basis of direct cost plus allowable indirect costs and the earned portion of the fee. Since 29 31 September 14, 1995, fees for services provided by the Company pursuant to new registrations have been recognized as revenue evenly over the initial 24-month subscription period. Fees from renewals are recognized as revenue evenly over the 12-month subscription period. The Company records revenue net of an estimated provision for uncollectible accounts. At March 31, 1997, the Company had deferred net revenue of $36.9 million, of which $25.3 million will be recognized over the next twelve months. See Notes 2 and 3 of Notes to Financial Statements. Intranet Services. Substantially all of the Company's Intranet services revenue is derived from professional services which are generally provided to clients on a "time and expense" basis. Professional services revenue is recognized as services are performed. The Company also performs a limited number of fixed-price projects under which revenue is recognized using the percentage-of-completion method. The Company also derives revenue from remote monitoring and hosting services; however, such revenue has not been significant to date. Remote monitoring and hosting revenue is recognized ratably over the term of the contract. Since professional services revenue for Intranet services is recognized by the Company only when network systems engineers are engaged on client projects, the relative utilization of network systems engineers directly affects the Company's operating results. In addition, a majority of the Company's Intranet services operating expenses, particularly personnel and related costs, depreciation and rent, are substantially fixed in advance of any particular quarter. As a result, any underutilization of network systems engineers may cause significant variations in operating results in any particular quarter and could result in losses for such quarter. Termination or completion of contracts in the Company's Intranet services business or failure to obtain additional contracts in its Intranet services business could have a material adverse effect on the Company's business, financial condition and results of operation. See "Risk Factors -- Potential Fluctuations in Quarterly Results." NationsBanc is the Company's largest Intranet services customer and accounted for 47.6% and 47.9% of the Company's Intranet services net revenue and 19.5% and 11.2% of the Company's total net revenue for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. NationsBanc originally contracted with the Company in 1993 to provide ongoing analysis, design, implementation and support engineering for its enterprise network. The Company currently provides network design and engineering services as well as a variety of project specific services for NationsBanc. The Company's current contract with NationsBanc is a three-year contract which commenced January 1, 1997 and is a requirements contract under which the Company's services are ordered by task orders issued by NationsBanc. The NationsBanc contract may be terminated by NationsBanc at any time upon 30-day prior written notice to the Company. There can be no assurance that the Company will obtain any additional task orders under the NationsBanc contract or maintain or be able to expand its Intranet services business. Failure to do so would materially and adversely affect the Company's business, financial condition and results of operations. See "Risk Factors -- Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue." Financial Presentation. The accompanying historical financial statements for all periods presented reflect the results of continuing operations related to the commercial activities of the Company only. The operating results of both the minority-based government contracts business, which was transferred into a separate entity prior to the acquisition of the Company by SAIC, and the remaining government-based business, which was transferred to SAIC effective February 1996, are reflected as discontinued operations in the Company's financial statements. Subsequent to the acquisition, the Company's Statements of Operations include revenue and costs directly attributable to the Company, as well as certain allocations from SAIC of indirect costs. Such allocations generally are based upon a number of factors, including, but not limited to, the proportionate labor costs of the Company to the rest of SAIC. The results of operations also include allocations of: (i) costs for administrative functions and services performed on behalf of the Company by centralized staff groups within SAIC; (ii) SAIC's general corporate expenses; (iii) other benefit costs, including, but not limited to, health insurance, disability and retirement costs; and (iv) cost of capital (through 30 32 December 31, 1996). Current and deferred income taxes and related tax expense have been recorded by the Company as if it were a separate taxpayer. The allocations and estimates in the financial statements are based on assumptions that the Company's management believes are reasonable under the circumstances. RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, the percentage relationship to net revenue of certain items in the Company's Statement of Operations. The percentage relationships for the year ended December 31, 1995 were derived by combining the Company's results of operations for the period January 1, 1995 through March 10, 1995 and the period March 11, 1995 through December 31, 1995 which, respectively, are periods before and after the date of the SAIC acquisition. Accordingly, the data for these two periods and the periods preceding and following the acquisition were prepared on differing bases of accounting and, as a result, the comparability of such percentage relationships with other periods is limited, primarily as a result of the goodwill amortization, new corporate services agreements and interest expense related to outstanding debt balances.
PERCENTAGE OF NET REVENUE --------------------------------------------- THREE MONTHS FISCAL YEAR ENDED ENDED DECEMBER 31, MARCH 31, ------------------------- --------------- 1994 1995 1996 1996 1997 ----- ----- ----- ----- ----- Net revenue....................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue................................... 61.1 87.9 77.8 126.4 61.2 ----- ----- ----- ----- ----- Gross profit...................................... 38.9 12.1 22.2 (26.4) 38.8 Research and development expenses................. -- -- 3.6 -- 3.5 Selling, general and administrative expenses...... 30.7 36.9 33.3 39.5 26.6 Interest expense (income)......................... 2.2 0.9 (2.7) -- (1.7) ----- ----- ----- ----- ----- Income (loss) from continuing operations before income taxes.................................... 6.0 (25.7) (12.0) (65.9) 10.4 Provision (benefit) for income taxes.............. 2.2 (3.6) (3.4) (18.7) 4.4 ----- ----- ----- ----- ----- Income (loss) from continuing operations, net of income taxes.................................... 3.8% (22.1)% (8.6)% (47.2)% 6.0% ===== ===== ===== ===== =====
In September 1995, the Cooperative Agreement between the Company and the NSF was amended from a cost reimbursement plus fixed-fee contract to a fee-based registration contract. The Company believes that the change to a subscription-based pricing model, combined with the Company's recent growth, make period to period comparisons of its operating results less meaningful and that the results for any period should not be relied upon as an indication of future performance. The limited operating history of the Company in its current business model makes the prediction of future results of operations difficult and, therefore, the recent revenue growth experienced by the Company should not be taken as being indicative of the rate of revenue growth, if any, that can be expected in the future. See "Risk Factors -- Limited Operating History" and "-- Potential Fluctuations in Quarterly Results." COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1997 Net Revenue. Net revenue increased 271% from $2.3 million for the three months ended March 31, 1996 to $8.7 million for the three months ended March 31, 1997. This increase in net revenue was primarily attributable to the increase in the number of domain name subscriptions, principally in the .com TLD. Subscription growth has been driven by the widespread use and adoption of the Internet and Intranets by businesses and individuals. Net revenue from registration services increased 623% from $913,000 for the three months ended March 31, 1996 to $6.6 million for the three months ended March 31, 1997. Net registrations increased 233% from approximately 246,000 at March 31, 1996 to approximately 818,000 at March 31, 1997. Notwithstanding the $36.9 million of deferred revenue at 31 33 March 31, 1997, of which $25.3 million will be recognized over the next twelve months, the Company's revenue is dependent in large part on the continued growth of the Internet and the Company's ability to maintain its position as the leading Internet domain name registration service provider worldwide. Net revenue from Intranet services increased 43% from $1.4 million for the three months ended March 31, 1996 to $2.0 million for the three months ended March 31, 1997. The growth was mainly attributable to several new contracts that were entered into subsequent to March 31, 1996, primarily with non-U.S. customers. A number of these contracts were obtained through subcontracts with, or with leads originated by, SAIC. NationsBanc, the Company's largest Intranet services client, accounted for $972,000 or 11.2% of the Company's total net revenue for the three months ended March 31, 1997 and $796,000 or 34.1% of the Company's total net revenue for the three months ended March 31, 1996. During the first quarter of 1997, a number of services the Company's had historically performed for NationsBanc were not renewed. The Company believes this reflects NationsBanc's focus on increasing its internal information technology staff as well as its continued efforts to integrate information technology staff from recent acquisitions. These actions had minimal financial impact on the first quarter, but will have a negative financial impact on the Company's Intranet services revenue for the balance of 1997. The Company believes NationsBanc will continue to be a significant customer of its Intranet services business, but to a lesser extent than in previous years, both in terms of dollars and as a percentage of its total net revenue. See "Risk Factors -- Limited Services to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue," "-- Uncertain Status of the Cooperative Agreement," "-- Competition in Domain Name Registration Business," "-- Recommendations and Proposals to Increase Competition in Registration Services" and "-- Dependence on Future Growth of the Internet and Internet Infrastructure." Cost of Revenue. Cost of revenue consists primarily of salaries and employee benefits, fees paid to subcontractors for work performed in connection with projects, depreciation, lease costs of the operations infrastructure and the associated operating overhead. Cost of revenue increased 79% from $3.0 million for the three months ended March 31, 1996 to $5.3 million for the three months ended March 31, 1997. This increase was primarily associated with labor and overhead associated with the Company's registration business. The Company continues to invest in improvements to the back office component of its domain name registration business and has made investments in additional hardware, software and staffing and currently anticipates that it will continue to make significant investments in its back office for the foreseeable future. As a percentage of net revenue, cost of revenue decreased from 126.4% for the three months ended March 31, 1996 to 61.2% for the three months ended March 31, 1997. This decrease primarily reflects economies of scale that the Company has begun to achieve due to the growth of its subscription-based domain name registration business. In the near term, the continued need for back-office investments is expected to significantly offset any overall margin improvements arising from economies of scale. Research and Development Expenses. Research and development expenses consist primarily of compensation expenses to support the development and enhancement of the Company's technologies. There were no research and development expenses for the three months ended March 31, 1996. For the three months ended March 31, 1997, research and development expenses were $311,000 or 3.5% of net revenue. To date, all of the Company's development costs have been expensed as incurred. The Company expects that the level of research and development expenses will increase significantly in the near future in absolute dollars and as a percentage of net revenue as the Company invests in new product and service offerings. Selling, General and Administrative Expenses. Selling, general and administrative expenses consist primarily of salaries of business development, general management, administrative and financial personnel, outside professional fees and amortization of goodwill associated with the Company's acquisition by SAIC. Selling, general and administrative expenses increased 150% from $921,000 for the three months ended March 31, 1996 to $2.3 million for the three months ended March 31, 1997. The 32 34 increase was primarily attributable to increased management and administrative staff and an increase in legal costs associated with the administration of the Company's domain name dispute policy. During the quarter, the Company was notified that one of its Intranet services customers had filed for bankruptcy, resulting in a $194,000 bad debt write-off. As a percentage of net revenue, selling, general and administrative expenses decreased from 39.5% for the three months ended March 31, 1996 to 26.6% for the three months ended March 31, 1997. The decrease in percentage of net revenue reflects economies the Company has begun to achieve due to the growth of both its domain name registration and Intranet services businesses. The Company expects that the level of selling, general and administrative expenses will increase significantly in the near future in absolute dollars as operations expand. Interest Expense (Income). The Company had no interest income or expense for the three months ended March 31, 1996 as compared to interest income of $149,000 for the three months ended March 31, 1997. The change is primarily attributable to positive cash flow associated with the Company's registration services business. Income Taxes (Benefit). The income tax benefit was $436,000 for the three months ended March 31, 1996 as compared to an income tax expense of $382,000 for the three months ended March 31, 1997. The effective tax rate changed from 28.3% for the three months ended March 31, 1996 to 42.5% for the three months ended March 31, 1997. The difference between the effective rates was attributed to the relative impact that non-deductible goodwill had on pre-tax operating income or loss for the quarter. The goodwill amount is being amortized by the Company over five years and is associated with the acquisition of the Company by SAIC. COMPARISON OF YEARS ENDED DECEMBER 31, 1995 AND 1996 Net Revenue. Net revenue increased 191% from $6.5 million in 1995 to $18.9 million in 1996. This increase in net revenue was primarily attributable to the increase in the number of domain name subscriptions, principally in the .com TLD, as well as the Company's shift to a subscription-based pricing model. Net revenue from registration services increased 594% from $1.6 million in 1995 to $11.1 million in 1996. Net revenue in 1995 primarily reflects the cost reimbursement plus fixed-fee contract with the NSF whereas net revenue for 1996 reflects the Company's subscription-based pricing model. Net registrations to the Company's domain name registration service increased 254% from 177,000 at December 31, 1995 to approximately 627,000 at December 31, 1996. Net revenue from Intranet services increased 57% from $4.9 million in 1995 to $7.7 million in 1996, including an increase in net revenue from NationsBanc, the Company's largest Intranet services customer, which increased 42% from $2.6 million in 1995 to $3.7 million in 1996. The growth was primarily attributable to increased funding within NationsBanc to support internal network integration and expansion. The Company also experienced growth from a number of new Intranet services customers, many of which were obtained through subcontracting with and utilizing leads from SAIC. NationsBanc accounted for 19.5% of total net revenue in 1996. NationsBanc accounted for 40.8% of total net revenue and the NSF (under the cost reimbursement plus fixed-fee contract) accounted for 20.8% of total net revenue in 1995. No other source of revenue accounted for more than 5% of total net revenue in either year. Cost of Revenue. Cost of revenue increased 157% from $5.7 million in 1995 to $14.7 million in 1996. The increase in cost was related primarily to increases in the cost of labor and overhead as a result of the Company's rapid growth. Effective with the September 14, 1995 amendment to the Cooperative Agreement which implemented the subscription-based pricing model, the Company has established and continues to develop its back office capability. This required the Company to make significant investments in hardware and software as well as to utilize a number of third-party vendors in support of back office requirements. In particular, the Company began to outsource portions of its back office operations during the fourth quarter of 1996. The principal benefit of outsourcing was to increase the capacity and efficiency of its back office operations; however, such action alone has not significantly impacted operating margins. 33 35 As a percentage of net revenue, cost of revenue decreased from 87.9% in 1995 to 77.8% in 1996. This decrease reflects economies of scale that the Company has begun to achieve due to the growth of its subscription-based registration business. Research and Development Expenses. There were no research and development expenses in 1995, in large part because registration system enhancements were reimbursable under the Cooperative Agreement. In 1996, research and development expenses were $680,000 or 3.6% of net revenue. To date, all of the Company's development costs have been expensed as incurred. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 162% from $2.4 million in 1995 to $6.3 million in 1996. The increase was primarily attributable to increases in management, administrative and business development staff, as well as additional facility costs and increased legal costs associated with the administration of the Company's domain name dispute policy. As a percentage of net revenue, selling, general and administrative expenses decreased from 36.9% in 1995 to 33.3% in 1996, reflecting the generally fixed nature of certain general and administrative expenses as well as management's control of such costs. Interest Expense (Income). The Company had net interest expense of $61,000 in 1995 as compared to interest income of $496,000 in 1996. The change is primarily attributable to positive cash flow in 1996 associated with the Company's subscription-based registration business. Income Taxes (Benefit). The income tax benefit was $239,000 in 1995 as compared to $643,000 in 1996. The effective tax rate increased from 14.3% in 1995 to 28.4% in 1996. The difference between the effective tax rates was primarily attributable to non-deductible goodwill comprising a higher percentage of the Company's net loss in 1995. Discontinued Operations. Immediately prior to the acquisition of the Company by SAIC, the portion of the Company's business relating to the minority-based government business had been transferred into a separately-owned entity. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. This transfer was effective as of February 1996. November 1995 was the measurement date for discontinued operations for accounting purposes. The activities of both the minority-based government business and the remaining government-based business are reflected as discontinued operations. Net income (loss) from discontinued operations excludes general corporate overhead of the Company. No gain or loss was incurred as a consequence of the transfer of these businesses. In 1995, discontinued operations incurred a net loss of $1.4 million. The loss was primarily attributable to the Company's remaining government business, which increased the Company's provision for uncollectable accounts associated with the bankruptcy of a prime contractor, high interest costs associated with payment issues from other prime contractors and over-runs of fixed-price and fixed-rate contracts. As mentioned above, this business was transferred to SAIC effective as of February 1996. COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1995 Net Revenue. Net revenue increased 29% from $5.0 million in 1994 to $6.5 million in 1995. The increase in net revenue was primarily attributable to the Company's Intranet services business which increased its revenue 26% from $3.9 million in 1994 to $4.9 million in 1995. The Company developed a number of new customers mainly in the banking industry, as well as subcontracting with and utilizing leads from SAIC. NationsBanc and the NSF (under the cost reimbursement plus fixed-fee contract) together accounted for 85.2% and 62.0% of net revenue in 1994 and 1995, respectively. No other source of revenue accounted for more than 5% of net revenue in either year. Cost of Revenue. Cost of revenue increased 86% from $3.1 million or 61.1% of net revenue in 1994 to $5.7 million or 87.9% of net revenue in 1995. The 1995 increase in absolute dollars and as a percentage of net revenue was attributable to increased costs in the Company's Intranet services 34 36 business as the Company invested in technical support and additional infrastructure in order to attract and maintain clients in 1995. In addition, the Company began to significantly expand its back office capability in support of the September 14, 1995 amendment to its Cooperative Agreement with the NSF, which introduced a subscription-based pricing model for its domain name registration services. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased 55% from $1.5 million or 30.7% of net revenue in 1994 to $2.4 million or 36.9% of net revenue in 1995. The increase was primarily attributable to additional costs necessary to support the growth in the Company's business and professional staff during 1995. Interest Expense (Income). Net interest expense decreased 44% from $109,000 or 2.2% of net revenue in 1994 to $61,000 or 0.9% of net revenue in 1995. The decrease was primarily attributable to cash flow improvements from the Company's Intranet services business. Income Taxes (Benefit). The income tax provision was $114,000 in 1994 compared with a $239,000 benefit for income taxes in 1995. The 1994 effective tax rate was 37.6% as compared to the 1995 effective tax rate of 14.3%. The difference between the effective rates was attributed to the relative impact which non-deductible goodwill had on pre-tax operating income or loss for the year. Discontinued Operations. Discontinued operations incurred a net loss of $1.2 million in 1994 as compared to a net loss of $1.4 million in 1995. The 1994 loss was primarily attributable to the minority-based government business which experienced several large over-runs related to fixed-price and fixed-rate contracts. This business was transferred into a separately-owned entity immediately prior to the acquisition of the Company by SAIC on March 10, 1995. The loss in 1995 was primarily attributable to the Company's remaining government business, which increased the Company's provision for uncollectable accounts associated with the bankruptcy of a prime contractor, high interest costs associated with payment issues from other prime contractors and over-runs of fixed-price and fixed-rate contracts. As mentioned above, this business was transferred to SAIC effective as of February 1996. FACTORS AFFECTING OPERATING RESULTS As a result of the Company's limited operating history, especially with regard to its subscription-based registration service business, the Company does not have significant historical financial data on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenue and to a large extent are fixed. As a result, quarterly sales and operating results generally depend on the volume of and ability to fulfill registration requests, which are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of demand for the Company's services in relation to the Company's expectations would have an immediate adverse impact on the Company's business, operating results and financial condition. In addition, the Company expects a significant increase its operating expenses as it funds greater levels of product and services development, increases its sales and marketing operations, updates systems and infrastructure, opens new offices, develops new distribution channels and broadens its customer support capabilities. To the extent that such expenses precede or are not subsequently followed by an increase in revenue, the Company's business, operating results and financial condition will be materially and adversely affected. The Company believes that future operating results will be subject to quarterly fluctuations due to a variety of factors, many of which are beyond the Company's control. Such factors may include, but are not limited to, the introduction of competing TLDs, variations in the number of requests for domain name registrations, demand for the Company's services, introduction or enhancements of services by the Company or its competitors, market acceptance of new service offerings, increased competition, costs associated with providing domain name registration services, litigation costs, termination or completion of contracts in the Company's Intranet service business or failure to obtain additional contracts in its Intranet services business, patterns of growth in the use of and interest in the Internet and general economic conditions. Operating results would be adversely affected by a downturn, or increased competition, in the market for domain name registrations or a failure to maintain existing or obtain anticipated contracts in its Intranet services business. Because the 35 37 Company expects an increase in its operating expenses for personnel and new services development, the Company would be materially and adversely affected if its revenues did not correspondingly increase. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Competition in Domain Name Registration Business," "-- Recommendations and Proposals to Introduce Competition in Registration Services," "-- Competition in Intranet Services and Internet-Enabling Businesses," "-- Uncollectible Receivables; Modifications to Billing Practices," "-- Technological Change and Additional Technology, Products and Services," and "-- Potential Fluctuations in Quarterly Results." 36 38 SELECTED QUARTERLY RESULTS OF OPERATIONS The following tables set forth certain unaudited quarterly financial information for each of the seven quarters in the period ended June 30, 1997. In the opinion of management, this information has been presented on the same basis as the audited financial statements appearing elsewhere in this Prospectus, and all necessary adjustments (consisting only of normal recurring adjustments) have been included in the amounts stated below to present fairly the unaudited quarterly results when read in conjunction with the audited financial statements of the Company and notes thereto. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED --------------------------------------------------------------------------------- FISCAL 1995 FISCAL 1996 FISCAL 1997 -------- --------------------------------------------- -------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, 1995 1996 1996 1996 1996 1997 1997 -------- -------- -------- --------- -------- -------- -------- (IN THOUSANDS) Net revenue.................... $ 1,533 $ 2,333 $4,496 $ 5,180 $6,853 $8,655 $ Cost of revenue................ 1,911 2,950 3,571 3,719 4,426 5,294 -------- -------- -------- --------- -------- -------- -------- Gross profit................... (378) (617) 925 1,461 2,427 3,361 Research and development expenses..................... -- -- 58 226 396 311 Selling, general and administrative expenses...... 607 921 1,449 1,932 1,978 2,301 Interest expense (income)...... 34 -- (86) (288) (122) (149) -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes........................ (1,019) (1,538) (496) (409) 175 898 Provision (benefit) for income taxes........................ (175) (436) (140) (116) 49 382 -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations................... $ (844) $(1,102) $ (356) $ (293) $ 126 $ 516 $ ======== ======== ======== ======== ======== ======== ======== PERCENTAGE OF TOTAL NET REVENUE --------------------------------------------------------------------------------- Net revenue.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% % Cost of revenue................ 124.7 126.4 79.4 71.8 64.6 61.2 -------- -------- -------- --------- -------- -------- -------- Gross profit................... (24.7) (26.4) 20.6 28.2 35.4 38.8 Research and development expenses..................... -- -- 1.3 4.4 5.8 3.5 Selling, general and administrative expenses...... 39.6 39.5 32.2 37.3 28.9 26.6 Interest expense (income)...... 2.2 -- (1.9) (5.6) (1.8) (1.7) -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations before income taxes........................ (66.5) (65.9) (11.0) (7.9) 2.5 10.4 Provision (benefit) for income taxes........................ (11.4) (18.7) (3.1) (2.2) 0.7 4.4 -------- -------- -------- --------- -------- -------- -------- Income (loss) from continuing operations................... (55.1)% (47.2)% (7.9)% (5.7)% 1.8% 6.0% % ======== ======== ======== ======== ======== ======== ========
37 39 LIQUIDITY AND CAPITAL RESOURCES From its acquisition by SAIC in March 1995 until December 1996, the Company participated in SAIC's centralized cash management system, whereby cash received from operations was transferred to SAIC's centralized cash accounts and cash disbursements were funded from such centralized cash accounts. Accordingly, cash requirements for operating purposes and for capital expenditures were met from this source. Beginning in 1997, the Company implemented its own cash management system. At March 31, 1997, the Company's cumulative net obligations to SAIC of $148,000 were classified under current liabilities on the balance sheet as Due to Parent. The intercompany activity primarily comprises corporate tax payments made by SAIC on behalf of the Company in accordance with the tax sharing arrangements between the Company and SAIC and salaries and benefits paid by SAIC on behalf of the Company. Effective in the second quarter of 1997, corporate taxes are paid to SAIC on a quarterly basis, with all other intercompany balances between SAIC and the Company paid on a monthly basis. At March 31, 1997, the Company had unrestricted cash and cash equivalents totaling $12.5 million. Pursuant to the terms of the September 14, 1995 amendment to the Cooperative Agreement, the Company is required to set aside 30% of collected registration and renewal fees. The Company reflects NSF's set aside funds along with the appropriate percentage of net accounts receivable as restricted assets and has recorded an equivalent, related current liability. At March 31, 1997, the restricted assets totaled $23.8 million. See Notes 2 and 3 to the Financial Statements. Revenue from the Company's two-year initial registration fee is effectively taxable in full in the year of registration, while for financial reporting purposes, the revenue is deferred and recognized ratably over the 24-month period. Thus, the provision (benefit) for income taxes based on book income (loss) from operations is significantly different from the required tax payments based on taxable income. Due to this accelerated revenue recognition for tax purposes, the Company's resultant tax liability is funded in advance of the corresponding financial reporting revenue. At March 31, 1997, the Company had $14.2 million of deferred tax assets primarily due to this revenue timing difference. See "Relationship with SAIC -- Corporate Services Agreement." The Company believes that the net proceeds from the sale of Class A Common Stock offered hereby, together with its current cash balances, will be sufficient to meet its working capital and capital expenditure requirements for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent that the Company experiences growth in the future, the Company anticipates that its operating and investing activities may use cash. Consequently, any such growth may require the Company to obtain additional equity or debt financing. The sale of additional equity or convertible debt securities will result in additional dilution to the Company's stockholders. In addition, although there are no present understandings, commitments or agreements with respect to any acquisitions of other businesses, products or technologies, the Company from time to time evaluates potential acquisitions of other businesses, products and technologies and may in the future require additional equity or debt financings to consummate such potential acquisitions. Capital expenditures for continuing operations were $1.9 million and $1.3 million for the year ended December 31, 1996 and the three months ended March 31, 1997, respectively. These expenditures were primarily for computer equipment. Commencing in August 1996, the Company adopted a program of leasing most of its computer equipment under noncancellable 24- and 36-month leases to allow the Company to maintain the latest technology within its operating infrastructure. The Company is currently reviewing its 1997 capital expenditure plans and anticipates expenditures of approximately $5 million to $6 million for the balance of 1997. The Company expects that a majority of these expenditures will be financed under lease agreements ranging from 24 to 36 months. 38 40 BUSINESS The following discussion contains forward-looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in "Risk Factors" and elsewhere in the Prospectus. Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. Net registrations within the TLDs maintained by the Company increased by 233% from approximately 246,000 domain names registered at March 31, 1996 to approximately 818,000 domain names registered at March 31, 1997. The Company believes that commercial enterprises and individual Internet users worldwide are increasingly recognizing the .com TLD as a desirable address for commercial presence on the Internet. Net registrations in the .com TLD increased from approximately 217,000 at March 31, 1996 to approximately 721,000 at March 31, 1997, representing 88% of the Company's total net registrations at March 31, 1997. With over 10 million businesses and over 750,000 active trademarks and service marks in the United States alone, the Company believes that the potential for continued growth of domain name registrations by commercial entities and services related to those registrations is substantial. Net revenue from Internet domain name registration subscriptions accounted for 76.5% of the Company's net revenue for the three months ended March 31, 1997. The Company also provides Intranet consulting services to large companies that desire to establish or enhance their Internet presence, or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from approximately $3 billion in 1996. Net revenue from Intranet services accounted for 23.5% of the Company's net revenue for the three months ended March 31, 1997. The Company also intends to develop a portfolio of Internet-enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. INDUSTRY BACKGROUND The Internet is a global network of millions of interconnected computers and computer networks that allow businesses, other organizations and individuals to communicate. Historically, the Internet had been used by a limited number of academic institutions, defense contractors and government agencies to facilitate remote access to host computers and transmit electronic mail. Recently, however, use of the Internet has increasingly become dominated by a broad range of commercial organizations and individuals who utilize the Internet to communicate electronically, to distribute and retrieve information and to conduct commerce. Advances in technology, low-cost Internet access and an increasing corporate reliance on distributed information environments have fueled the rapid growth of the Internet. According to estimates published by the International Data Corporation, the number of World Wide Web users will be approximately 163 million by the end of 2000, compared to approximately 35 million at the end of 1996. The Internet has been and continues to be loosely administered by a number of government agencies that were involved in the creation of its infrastructure (initially ARPA and, more recently, the NSF) and a number of nonprofit groups formed to address specific Internet governance issues. As no single organization has formal authority over all aspects of the Internet, it continues to operate under a system of mutual collaboration and cooperation. With the commercialization of the Internet, the role of many of these entities in future Internet administration has become less clear and private parties 39 41 have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. The NSF, for example, has completed a two-year phased withdrawal of its funding for the Internet "backbone" and has transferred this responsibility to a group of private telecommunications carriers that are commercially funded. The Company believes that in order to support the demands placed on this evolving and rapidly growing medium of commerce and information exchange, a wide range of products and services will need to be developed and enhanced, including: (i) domain name registration services; (ii) Intranet services; and (iii) Internet-enabling products and services. Domain Name Registration Services. All communication on the Internet requires an electronic address. Currently, the Internet functions through the establishment of a unique Internet identity (a "domain name") for an electronic address and the proliferation of such domain name in all of the global Internet root servers. An Internet domain name is made up of a top-level domain ("TLD"), such as .com or .net, and additional domain levels consisting of at least one additional domain level, referred to as a second level domain name. For example, in the domain name "companyX.com," "companyX" is the second level domain name. With the increased commercialization of the Internet, second level domain names are being utilized not only by large corporations but also increasingly by other users, including small businesses, organizations and individuals. Particularly within the .com TLD, users are also registering domain names to establish Internet identities for other purposes such as trademarks, products and events. The most common TLDs include .com, used primarily by commercial entities, .org for nonprofit organizations, .net for network service providers, .edu for universities and .gov for United States governmental entities, as well as country code TLDs represented by "." followed by two letter country codes (e.g., .us for the United States, .uk for the United Kingdom and .de for Germany). Because the Internet is not bound by geography or lines of business, coordination and administrative services are required for the registration, allocation and use of TLDs and for the effective operation of the Internet. Initially, in the United States, registration of domain names was primarily performed by government or nonprofit agencies. In 1993, the NSF entered into the Cooperative Agreement with the Company for the performance of these functions for the .com, .org, .net, .edu and .gov TLDs. The Cooperative Agreement by its terms expires in March 1998, but may be terminated at any time by the NSF at its discretion or by mutual agreement. See "Risk Factors -- Uncertain Status of the Cooperative Agreement," "-- Recommendations and Proposals to Increase Competition in Registration Services" and "-- Relationship with the NSF; Recent Developments in the Internet Community." Intranet Services. Many enterprises are adopting "Intranets" that employ Internet data formats and communications protocols. Intranets enhance user productivity and connectivity allowing users controlled access to internal information while also accessing and exchanging information on the Internet. As more businesses, organizations and individuals establish an Internet presence and begin to deploy Intranets, there will be an increasing demand for Intranet development and re-engineering services, network and systems security services and Intranet-enabled business solutions. In addition, the Company believes that Intranets are becoming increasingly sophisticated and are allowing users increased capabilities and improved access to information. As a result, corporations are increasingly seeking experienced networking firms to enable all of these services. According to Zona Research, Inc., the market for Intranet services in the year 1999 will exceed $14 billion, up from approximately $3 billion in 1996. Internet-Enabling Products and Services. The proliferation of Internet users provides businesses, other organizations and individuals with new means by which to conduct business. To facilitate business-to-business and business-to-consumer transactions, Internet users are seeking important enabling products and services, such as transaction security services, electronic payment mechanisms and directory and information services. The Company believes there will be opportunities for entities which can facilitate, develop and distribute such products and services and make them more readily accessible and easy to use. 40 42 THE NSI SOLUTION Network Solutions is the leading Internet domain name registration service provider worldwide. The Company currently acts as the exclusive registrar of second level domain names within the .com, .org, .net, .edu and .gov TLDs pursuant to the Cooperative Agreement with the NSF. In this capacity, the Company enables the efficient operation of the Internet by supplying each of the Internet root servers located around the world with an identical copy of the file for all second level domain names in these TLDs. By registering Internet domain names, the Company enables businesses, other organizations and individuals to establish a unique Internet presence from which to communicate and conduct commerce. The Company believes that it has been at the forefront of the development, administration and coordination of standards, policies and functions needed to facilitate the registration process, including dissemination of domain name database information to root servers throughout the world and administration of a domain name dispute policy. The Company is working to expand its domain name registration business and to continue to improve the registration process by: (i) increasing the brand recognition of the .com TLD; (ii) expanding its relationships with Internet access providers by offering enhanced registration services to their customers; (iii) stimulating demand for domain name registrations in targeted customer segments; (iv) working with major platform providers to embed the registration function into server software applications; (v) facilitating ease of use of and access to its registration service; and (vi) establishing international alliances and developing multilingual capability. The Company intends to develop a portfolio of Internet enabling products and services, which may include directory and distribution services, that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. The Company also provides Intranet consulting and network design and implementation services to large companies that desire to establish or enhance their Internet presence or "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company's Intranet services have evolved from the Company's Internet pioneering efforts that date back to 1979 and presently include: (i) Intranet development and re-engineering; (ii) network and systems security; and (iii) Intranet-enabled business solutions. THE NSI STRATEGY The Company's goal is to maintain its position as the leader in Internet domain name registration services and to build on this position to be a leading provider of Intranet services and Internet enabling products and services. The Company's strategy includes the following key elements: Maintain Position as a Leading Provider of Registration Services. The Company intends to maintain and enhance its position as a leader in domain name registration by promoting the .com TLD as the accepted and preferred Internet address for commercial presence on the Internet worldwide. The Company also intends to develop and implement standards, policies and functions designed to enhance the ease, speed and security of the registration process by adding new capabilities to facilitate the registration process and providing quality customer service and support. Establish and Expand Marketing Relationships. The Company intends to establish and expand relationships with companies worldwide to promote its services, penetrate new customer bases and integrate third party products and services. The Company has established, and is seeking to further pursue relationships with, Internet access providers to enhance its ability to offer second level domain names and pursue its Intranet services opportunities. Maintain Active Role in Establishment of Future Internet Standards and Policies. The Internet currently operates under a system of mutual collaboration and cooperation and has historically been administered by governmental and nonprofit organizations. The Company intends to continue to cooperate with these organizations and maintain an active role in the global Internet community to ensure that the Internet continues to flourish and that the Company remains at the forefront of continuing change in the Internet. The Company believes that its expertise in the Internet and its 41 43 participation in the Internet community should enable it to facilitate the proliferation of Internet usage worldwide and provide it with a competitive advantage in the development of its service offerings. Build and Strengthen Intranet Services Business. The Company intends to further develop its existing in-depth knowledge of and experience in Internet technologies to develop a leading Intranet services business. The Company believes that delivering dependable, high-quality Intranet solutions is critical to strengthening its relationships with existing clients, gaining repeat business and generating new business from referrals. Further, the Company intends to utilize its relationship with SAIC in this area by continuing to work with SAIC on a subcontract basis and seeking referrals to SAIC's customers and strategic partners. Provide Complementary Enabling Products and Services. The Company intends to develop a portfolio of Internet enabling products and services that build on its registration activities and the customer data that the Company collects. These enabling products and services could include directory and other services to be developed by the Company and distribution of third party product and service offerings through on-line enrollment for such products and services embedded within the Company's domain name registration home page. Leverage Technology Leadership. The Company has assembled management and engineering teams with extensive experience in the information technology industry and specifically the Internet and intends to leverage this experience in the development of enabling technologies to support the continued enhancement of infrastructure flexibility and scalability, customer ease of use and embeddedness in access sources. The Company is committed to integrating state-of-the-art technology in its service offerings and believes that service quality and reliability should be a significant differentiating factor in its market. Pursue Strategic Acquisitions. The Company intends to identify and, where appropriate, pursue acquisition opportunities which would provide businesses, products, services or technologies complementary to the Company's current business, although it is not currently contemplating any such acquisitions. The Company's strategy involves substantial risk. There can be no assurance that the Company will be successful in implementing its strategy or that its strategy, even if implemented, will lead to successful achievement of the Company's objectives. If the Company is unable to implement its strategy effectively, the Company's business, financial condition and results of operations would be materially and adversely affected. NSI SERVICES Registration Services. Registration services is the Company's core business. The Company registers second level domain names in the .com, .org, .net, .edu and .gov TLDs, enabling registrants to establish a unique identity on the Internet. The Company's largest source of customers are Internet access providers, which request domain names on behalf of their subscribers. Prior to September 14, 1995, the Company was reimbursed by the NSF for providing registration services under a cost reimbursement plus fixed-fee contract. On September 14, 1995, the NSF amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 30% of the subscription fees collected are required to be set aside to be disbursed in a manner approved by the NSF for the enhancement of the intellectual infrastructure of the Internet. See "-- Relationship with the NSF; Recent Developments in the Internet Community." The Company believes that high quality customer support is vital to client satisfaction. The registration subscription fee provides the customer with access to a registry help desk and an on-line processing facility and account information updates. The Company's help desk and on-line processing 42 44 facility are factors in the success of the Company's registration business because they are the front line to the customer and provide initial and ongoing customer service and support. This facility currently processes over 40,000 telephone calls and over 300,000 electronic transactions monthly. At the end of 1996, the Company entered into arrangements to outsource certain back office operations, which the Company believes has improved customer service and account handling and expanded the Company's capacity to service larger volumes of registrants. See "-- Operations." The Company has been registering domain names pursuant to the Cooperative Agreement since 1993 and has made significant investments in its registration services business. The Company believes that it currently possesses the following competitive advantages in the domain name registration business: - - Brand Recognition of the .com TLD. The Company believes that the .com TLD, of which the Company is currently the exclusive registrar, has perceived value to commercial users on the Internet. Further, the Company believes that there is an emerging trend among commercial entities outside of the United States to establish an Internet presence within the .com TLD, rather than within or in addition to a country code TLD. - - Large, Established Customer Base. The Company currently maintains in excess of one million unique domain name registrations. As a result, the Company believes it has the infrastructure required to realize significant scale efficiencies throughout the registration process and believes that it has established credibility in the Internet community. In addition, this large customer base allows the Company to benefit from its policy which requires that customers prepay for two years for rights to a unique domain name registration. As customers invest in their web sites for advertising, branding and other business-critical activities, the Company believes they will be increasingly inclined to renew at the end of the initial two-year subscription period. - - Strategic Agreements with Internet Access Providers. The Company has entered into agreements to provide specialized services to certain Internet access providers who register a significant number of second-level domain names with the Company on behalf of such providers' customers. This program provides the Premier Partner with customized registration services and provides the Company with a multi-year registration stream from the Premier Partner. To date, the Company has entered into agreements with 26 Internet access providers, including: MCI, Inc., America Online, Incorporated (PrimeHost Division), TABNet and Rapidsite, Inc. - - Established Technical Infrastructure. The Company believes that the technical requirements to build and to operate a competitive domain name registry are significant. Substantial portions of the Company's software is custom-developed and proprietary. The Company's internal software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. See "-- Operations." - - Experience in the Administration of Domain Name Dispute Policy. The Company's staff is experienced in the establishment and administration of the Company's domain name dispute policy, which is an integral part of the maintenance and administration of the Company's domain name registration business. As of June 25, 1997, the Company had received over 2,500 written objections to the registration and use of certain domain names. Of these, approximately 1,200 were disputes in which the Company's domain name dispute policy was involved. Although 26 of these objections have resulted in litigation involving the Company, as of June 25, 1997, no damages have been awarded against the Company to any plaintiff. The Company expends considerable management and legal resources in the development, refinement and administration of its domain name dispute policy. - - Skilled Technical Personnel. The Company believes that significant engineering talent is required to create a registration services capability and that knowledge of DNS structures, Internet security, data routing and routing protocols is critical to creating and enhancing registration service capabilities. The Company developed RWhois, a standard open protocol, that is used for the registration services business. The Company's engineering staff has significant expertise in the 43 45 RWhois protocol. The Company believes that engineers skilled in protocol development are difficult to identify, hire and retain and thus its staff of engineers represents a valuable resource. The Company believes that these competitive advantages are significant and that existing and additional competing registries will need similar capabilities. In addition, the Company is working to expand its domain name registration business and to continue to improve the registration process by: - - Increasing the Brand Recognition of the .com TLD Worldwide. The Company believes that it can continue to grow its Internet registration business by promoting global brand recognition of the .com TLD. The Company has begun and intends to continue to promote the use of the .com TLD and to establish .com as the most recognized domain for individuals and organizations conducting business on the Internet. - - Expanding Relationships With Internet Access Providers. The Company intends to build upon its current relationships with certain Internet access providers that have agreed to participate in its Premier Domain Registration Service program and intends to pursue relationships with additional Internet access providers. Through these relationships, the Company believes it will be able to deliver enhanced registration services and identify additional opportunities to expand its registration services business. - - Stimulating Demand for Domain Name Registrations in Targeted Customer Segments. The Company is seeking to expand the number of registrations in targeted customer segments both domestically and internationally. The Company believes that customer segments such as small business users, individuals, holders of trademarks, service marks and product marks and event sponsors could offer significant potential for growth if the Company actively markets a portfolio of registration services to these segments. - - Working with Major Platform Providers to Embed the Registration Function. The Company is seeking to expand its domain name registration business through agreements with major platform providers to embed an automated registration function through a "point-and-click" interface directly into the server initialization procedures. For example, in December 1996, the Company entered into an agreement with Microsoft Corporation ("Microsoft") to provide a "point-and-click" interface intended to allow users to automatically register a domain name with the Company upon initialization of the server. - - Facilitating Ease of Use and Access to Registration Services. The Company has undertaken a number of initiatives that are intended to make the registration process easier, more streamlined and more accessible. The Company believes that ease of use is becoming increasingly important as the Internet is being more widely adopted by users who are less technically sophisticated. The Company is currently in the process of simplifying the registration template accessed by customers to effect registration of a domain name. To facilitate payment of registration renewal fees, the Company intends to implement electronic payment mechanisms that will allow the user to pay for the domain name directly from the user's host machine. - - Establishing International Alliances and Developing Multilingual Capability. The Company intends to establish strategic alliances with international registries to build a foundation for its international operations. As these entities add Internet service to their offerings for their customers, the Company intends to offer "ease of use" solutions for entities worldwide for registration in the .com, .org and .net TLDs. The Company also intends to establish a multilingual call center capability to further assist with international registrations. Intranet Services. The Company provides consulting and network systems integration services for clients utilizing Internet technologies for internal networks (i.e., Intranets). The Company's network systems engineers have extensive knowledge of and experience in such areas as local area network ("LAN")/wide area network ("WAN") Internet protocols, router technology, switching technology, remote access technology, virtual private network technology, network security technology, network management technology, network components, IP addressing strategy, domain name architec- 44 46 ture, efficient IP address space usage, Web applications development, UNIX systems (highly modular and flexible computer systems) and network operating systems. By leveraging this knowledge and experience, the Company is able to provide solutions to clients' complex network needs. As part of its Intranet services offering, the Company provides Intranet development and re-engineering; network and systems security; and Intranet-enabled business solutions. - - Intranet Development and Re-engineering. The Company offers a full line of services to help develop, optimize, and integrate Intranet solutions in a manner tailored to individual clients. Some of the more significant services include Intranet business workflow and service level analysis; IP address space engineering; domain name system ("DNS") and dynamic host configuration protocol ("DHCP") architecture engineering; routing and switching architecture engineering; Extranet (IP networks through which companies run Web applications for external use by their customers) architecture engineering; virtual private network architecture engineering; electronic messaging architecture engineering; network capacity and performance management; and new technology integration. The Company also provides planning and analysis to implement disaster recovery and contingencies for network system failures. - - Network and Systems Security. The Company provides a full range of security consulting services, including security architecture assessment, planning and implementation. The security architecture establishes the access and protection controls that will permit internal and remote users to access computer systems, databases and applications on the network, while protecting against unauthorized or inadvertent access to information or misuse of systems services. The Company's methods to secure the backbone, LAN-to-WAN access, remote access and facilities can supplement or replace existing systems security measures. The Company maintains resident expertise in emerging network protocols, encryption and key technologies, firewalls, packet filters, proxy services, secure remote access strategies and secure Intranet servers. - - Intranet-Enabled Business Solutions. The Company offers Intranet- and Extranet-enabled solutions for client business applications and services. In this regard, the Company leverages Internet technologies to deliver enterprise-wide solutions and develop business automation systems that can be accessed by any client system, are quickly adaptable, and are easily maintained. Such solutions may include: implementation of Extranets to support clients' electronic commerce applications; planning and implementation of clients' Internet presence and commerce capabilities; re-engineering of legacy applications for Intranet-based delivery; and hosting of private and public Intranet servers. The Company also maintains an Intranet Solutions Center which provides outsourcing services for remote network and security systems monitoring, network performance management and management of the development and hosting of clients' total Web presence. NationsBanc is currently the Company's largest Intranet services client, accounting for 47.6% of the Company's Intranet services business net revenue and 11.2% of the Company's total net revenue in the three months ended March 31, 1997. NationsBanc originally contracted with the Company in 1993 and the Company currently provides network design and engineering services as well as a variety of project specific services for NationsBanc. The Company's current contract with NationsBanc is a three-year contract commencing January 1, 1997 and is a requirements contract under which the Company's services are ordered by task orders issued by NationsBanc. The Company sells and markets its Intranet services business primarily to large companies that desire to establish or enhance their Internet presence. The Company's Intranet services are generally provided to customers on a time and expense basis. The Company also performs a limited number of engagements on a fixed-price basis. Many of the Company's recent Intranet services clients have been developed through direct contact or referrals from its parent company, SAIC. The Company intends to continue to leverage its relationship with SAIC to access SAIC's major customers and strategic partners. The Company has recently begun to provide Intranet services on a limited basis in the Latin American market through Informatica, Negocios y Tecnologia S.A. ("INTESA"), SAIC's joint venture 45 47 with Petroleos de Venezuela, S.A., the Venezuela National Oil Company. As part of this joint venture, the Company is currently subject to a noncompetition arrangement pursuant to which the Company has agreed to provide, with certain limited exceptions, Intranet services in the Latin American market solely through INTESA. See "Risk Factors -- Limited Service Offerings to Date; Reliance on Domain Name Registration Services and Intranet Services for Substantially All Revenue." MARKETING AND DISTRIBUTION RELATIONSHIPS The Company intends to establish and expand relationships with companies worldwide to promote its services, penetrate new customer bases and integrate third party products and services. Strategic Agreements with Internet Access Providers. The Company has developed a service offering which provides specialized services to Internet access providers who register a significant number of second-level domain names per month on behalf of their customers. The Company's Premier Domain Registration Service offering provides a Premier Partner with personalized account management, customized billing and financial reports, priority registration with 24-hour customer support, private e-mail boxes and other customized features. To date, the Company has entered into agreements with 26 Internet access providers, including: MCI, Inc., America Online, Incorporated (PrimeHost Division), TABNet and Rapidsite, Inc. Server Software Applications. The Company has entered into an agreement with Microsoft to provide a "point-and-click" interface for an automated registration function. This interface is designed to facilitate the ease of the registration process for users of the server software and to allow for the Company to have a preferred provider position on the registration wizard screen that appears during the server initialization process. The Company is currently in discussions with certain other server platform providers pursuant to which such a "point-and-click" interface will be embedded in their server software. Internet Enabling Products and Services. The Company has entered into several agreements designed to allow the Company to build upon its strategy of becoming an Internet business center where a business or individual can have access to companies which provide the enabling products and services to conduct business on the Internet. The Company has entered into an agreement with VeriSign, Inc. ("VeriSign") pursuant to which the Company will provide its customers with direct access to VeriSign's server security certificates through the Company's domain name registration process. The Company will receive a portion of VeriSign's subscription fees for providing such access to VeriSign subscribers. The Company has also entered into an agreement with First Virtual Holdings Corporation ("First Virtual") pursuant to which the Company implemented First Virtual's VirtualPIN as a form of payment for the Company's customers. Under the agreement, users may register for First Virtual VirtualPINs through the registration process for which the Company receives a portion of the fee, assuming certain targets are met. Several other initiatives are being pursued, all focusing on utilizing the registration process to provide access to Internet enabling products and services. OPERATIONS To register a domain name within the .com, .org, .net, .edu and .gov TLDs, the Company's customer or its Internet access provider completes a registration template which is submitted to the Company via e-mail. Once the customer is registered, the Company loads the domain name into the root servers located around the United States and in Europe. The Company believes that the technical requirements to build and to operate a competitive domain name registry are significant. Substantial portions of the Company's in-house registration software have been custom-developed and are proprietary. The Company's in-house registration software includes an automated registration capability which currently processes in excess of 90% of all new registration requests without human intervention. The Company maintains a help desk and on-line processing facility which provides initial and ongoing customer service and support. This facility currently processes over 40,000 telephone calls and over 300,000 electronic transactions monthly. 46 48 The Company's registration services are supported by six T1 (high speed data communications line) links connected to four ISPs, with additional T1 links on order. By connecting to four different providers, the Company seeks to ensure constant access to the Internet. The Company currently uses an average of fifty percent of the bandwidth provided by the T1s and believes its current network and the anticipated increased capacity should sustain continued growth for the foreseeable future. The Company leases its computer equipment which allows the Company to maintain the latest technology within its operating infrastructure. The Company has approximately 100 UNIX workstations running a variety of applications to evenly distribute operations. Additionally, the Company utilizes several large network file servers to support its directory and registration services. These servers provide a mirrored file system for enhanced reliability and back-up coverage. On June 16, 1997, the Company opened a 31,000 square foot facility to support its Internet business operations. This leased facility is designed to meet current registration services customer support needs as well as to provide expansion capability for future business. It includes: (i) a call center; (ii) a training center equipped for both computer and telephone training, including a simulated operations environment; and (iii) a new computer room with expanded systems and telecommunications services. The Company believes that this new facility with the accompanying system enhancements should provide the environment and tools that are essential for quality customer support. Since November 1996, the Company has been outsourcing certain back office functions, including invoicing, check processing and credit card payment processing. The Company is not outsourcing its core proprietary automated registration process and associated security system. These outsourcing efforts, in conjunction with new invoicing procedures implemented in 1997, have improved customer service and account handling and expanded the Company's capacity to service larger volumes of registrants. OTHER PRODUCTS AND SERVICES DEVELOPMENT The Company's products and services development activities in areas other than registration services and Intranet services are focused primarily on the development of Internet-enabling products and services, including a possible directory service based on the RWhois protocol (an enhanced server version of the Whois protocol) developed by the Company. The Company's current directory service technology, which is made available free of charge, employs a look-up method called "Whois," a widely accepted Internet protocol and the interface to the Company's global registry database. Whois allows a user to perform simple queries for second level domain names and to retrieve additional information about a customer, including the customer's name, location and points of contact. The Company's Whois server currently receives more than 15 million queries per month. The Company intends to develop a portfolio of Internet-enabling products and services that allows the Company to build upon its position in the registration process and makes proper use of the customer data that it collects. There were no research and development expenses in 1995, in large part because any such expenditures were generally reimbursable under the NSF contract. In 1996, research and development expenses were $680,000 or 3.6% of net revenue. For the three months ended March 31, 1997, research and development expenses were $311,000 or 3.5% of net revenues. The Company believes that significant and continuing investments in products and services development will be required to maintain its position as the leader in the domain name registration business and to achieve its strategy of leveraging its registration services business to offer and distribute other enabling services. The Company's future financial performance will be dependent upon its ability to develop and commercialize in a timely manner new services that can be offered in conjunction with the Company's current domain name registration services and that meet the changing requirements of its customers. The successful development and commercialization of new products and services involves many risks, including the identification of new Internet and Intranet service opportunities, the successful completion of the development process, and the identification, retention and hiring of appropriate 47 49 research, development and technical personnel. There can be no assurance that the Company can successfully identify new products and service opportunities and develop and timely bring to market such new products and services, or that products and services or technologies developed by others will not render the Company's products and services or technologies noncompetitive or obsolete. RELATIONSHIP WITH THE NSF; RECENT DEVELOPMENTS IN THE INTERNET COMMUNITY In 1993, the Company entered into the Cooperative Agreement with the NSF, which had been funding the Defense Information Systems Agency, to act as the registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. Under the Cooperative Agreement, the Company was given the responsibility for ensuring the quality, timeliness and effective management of registration services to non-military Internet users and networks. The registration services to be provided by the Company under the Cooperative Agreement included domain name registration, domain name server registration, network number assignment and autonomous system number assignment and IP address mapping and allocation worldwide. During the term of the Cooperative Agreement, the Company is required to file periodic reports regarding its status and proposed budget and goals. At the conclusion of the Cooperative Agreement, the Company will be required to submit a final report describing all work performed and problems encountered. Originally, the Cooperative Agreement was a cost reimbursement plus fixed-fee contract but expressly contemplated that possible future changes under the Cooperative Agreement could include the imposition of a user-based fee structure. In 1995, in response to the rapidly growing volume of registrations from commercial entities (primarily in the .com TLD), the NSF and the Company mutually agreed to move from a cost reimbursement plus fixed-fee contract to a subscription fee based contract. Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to begin charging customers a subscription fee of $50 per year for each second level domain name registered. The Company's registration services customers in the .com, .org and .net TLDs are invoiced for a two-year subscription fee of $100 for initial registrations and $50 per year payable for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 70% of the subscription fees collected are retained by the Company and 30% are required to be set aside to be disbursed in a manner approved by the NSF for the enhancement of the intellectual infrastructure of the Internet. With the commercialization of the Internet, the role, if any, that the NSF will play in the future of the Internet and the legal authority underlying any such continuing role are at present unclear. Further, the Cooperative Agreement by its terms expires in March 1998 and may not be recompeted, although the NSF may, at its option, extend the Cooperative Agreement to September 1998. The Cooperative Agreement is subject to review by the NSF and may be terminated by the NSF at any time at its discretion or by mutual agreement. If the Cooperative Agreement (or the Company's status as the exclusive registrar for domain names in the .com TLD) is terminated, the Company's business, financial condition and results of operations could be materially and adversely affected. The NSF has stated that the Cooperative Agreement will not be re-awarded to the Company or awarded to any other entity. However, if the Cooperative Agreement is awarded to another entity, the Company's business, financial condition and results of operations would be materially and adversely affected. Withdrawal of the NSF's sponsorship of the Company's activities could create a public perception that the Company lacks authority to continue in its role as registrar or to charge fees for its domain name registration services. The impact, if any, of any such public perception is unknown but could materially and adversely affect the Company's business, financial condition and results of operations. The Cooperative Agreement does not prohibit the establishment of competing registries by entities other than the Company or the NSF. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and the Internet currently operates under a system of mutual cooperation. Various governmental, technical and Internet groups are currently discussing how the award and administration of future contracts for registration services in the .com TLD, other existing TLDs and new TLDs may take place, and are considering whether and how to enable other parties to enter the domain name registration business. The Company is also an 48 50 active participant in this process. A consensus regarding such issues could be reached and implemented in the near future and prior to the expiration of the Cooperative Agreement. For example, some members of the Internet community have discussed various concepts of adding new TLDs which could result in significant competition for domain name registrations, including competition on the price charged by the Company for domain name registrations. In February 1997, the IAHC issued its recommendation designed to increase competition in domain name registrations in which it proposed the creation of additional registries, additional TLDs and the possible sharing of new and existing TLDs. In April 1997, the IAHC issued an MOU seeking support for its recommendations. This MOU has been signed by a number of organizations in the Internet community. In April 1997, the Company issued its own recommendations to increase competition in domain name registration. The Company's recommendations focus on creating additional TLDs as well as on the future administration and technical operation of the Internet. Other groups or entities may also make other proposals concerning these and other issues. Implementation of competing registries, additional TLDs, the sharing of the Company's TLDs or other recommendations or proposals of these groups could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Government Regulation and Legal Uncertainties" and "Risk Factors -- Uncertain Status of the Cooperative Agreement" and "-- Recommendations and Proposals to Increase Competition in Registration Services." The Company has recently received authorization from the NSF to shift the allocation and administration of IP addresses to a not-for-profit organization. In support of this initiative, the Company has incorporated a not-for-profit organization named the American Registry for Internet Numbers (the "ARIN") to administer IP addresses for North and South America and parts of Africa. The Company anticipates that the responsibility for the allocation and administration of IP addresses will be transferred to ARIN by the fourth quarter of 1997. The Company has agreed with the NSF to provide financial support to ARIN through the end of the first quarter of 1998. The Company believes that the amount of such support will not be material to the Company's business, financial condition or results of operations. COMPETITION The Company currently is the exclusive registrar for second level domain names within the .com, .org, .net, .edu and .gov TLDs. Multiple registries do not currently register names in the same TLD, but this may change in the future. The Company currently faces competition in the domain name registration business from registries for country codes, third level domain name providers such as Internet access providers and registries of TLDs other than those TLDs currently being registered by the Company. A number of entities have already begun to offer competing registration services using other TLDs. Future competition in the Company's domain name registration business could come from many different companies, including, but not limited to, major telecommunications firms, cable companies and Internet access providers. Such entities have core capabilities to deliver registration services, such as help desks, billing services and network management, along with strong name recognition and Internet industry experience. Other companies with some or all of these capabilities may also enter the registration business. Also emerging are a growing contingent of domain name resellers. The Company's position as the leading registrar of domain names could be materially and adversely affected by the emergence of any of the foregoing competitors and potential competitors, many of which have significantly greater financial, technical, marketing and personnel resources than the Company. In addition, the Company's revenue and subscription fees could be reduced due to increasing competition. For example, if other entities are allowed to share the registration of domain names, these entities may bundle domain name registrations with other products or services, effectively providing such registration services for free. If operational and administrative arrangements and technology permitting multiple competitors to register domain names in the same TLDs are developed or if competition occurs within the Company's existing TLDs, the Company's business, financial condition and results of operations would be materially and adversely affected. 49 51 Companies with Internet expertise are current or potential competitors for the Company's Intranet consulting services. These companies include systems integrators and consulting firms, such as Andersen Consulting, IBM Global Services and International Network Services. The Company also competes with certain companies that have developed products that automate the management of IP addresses and name maps throughout enterprise-wide Intranets, and with companies with internally-developed systems integration efforts. A number of these competitors and potential competitors have greater financial, marketing, distribution, name recognition and other resources than the Company. There can be no assurance that the Company will be able to successfully compete in the Intranet services area. Failure by the Company to successfully compete in the Intranet services area could have a material adverse effect on the Company's business, financial condition and results of operations. In developing and distributing future products and services for the Internet-enabling services markets, the Company faces intense competition and expects to have multiple competitors for each of the products or services, if any, which it develops. Many of the Company's potential competitors have longer operating histories and significantly greater financial, technical and marketing resources and name recognition than the Company. Furthermore, the industry in which the Company intends to compete is characterized by rapid changes and frequent product and service introductions. To the extent a competitor introduces a competitive product or service prior to introduction of the same or similar product or service by the Company, market acceptance of the competitor's product or service may adversely affect the Company's competitive position. See "Risk Factors -- Competition in Intranet Services and Internet Enabling Businesses." GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES The Internet historically has been loosely administered by a number of government agencies which were involved in the creation of its infrastructure, initially ARPA and, more recently, the NSF. No single organization or entity (including the NSF) currently has formal authority over all aspects of the Internet and it currently operates under a system of mutual cooperation. Since the original role of the Internet was to link computers at governmental and academic institutions to facilitate communication and research, the Internet was historically administered by entities which were involved in sponsoring research rather than by any of the traditional federal or state regulatory agencies. With the commercialization and internationalization of the Internet, the role of these entities in Internet administration has become less clear and private parties have begun to assume a larger role in the enhancement and maintenance of the Internet's infrastructure. The NSF, for example, has completed a two-year phased withdrawal of its funding for the Internet "backbone" and has transferred this responsibility to a group of private telecommunications carriers which are commercially funded. This lack of regulation and the legal uncertainties arising from it pose a number of risks to the Company and to the commercial Internet industry in general. The effective operation of the Internet is dependent on the continued mutual cooperation and consensus among an increasing number of entities, many of which have widely divergent interests. For example, the IP addresses allocated by ISPs to their customers are originally allocated by the IANA. Thus, the effective operation of the Internet is dependent on such continued allocation of IP addresses by IANA. Continuing to achieve consensus may become difficult or impossible and may become extremely time-consuming and costly. Achieving consensus may be made more difficult because of the lack of leadership by any one entity. This lack of regulation creates great uncertainty as to the legality of any action, making business planning and operations difficult. Conversely, the lack of regulation could theoretically result in individuals and entities taking harmful or disruptive actions with respect to the Internet with impunity. There is a risk that a failure to achieve consensus among the various groups which are now informally administering the Internet could result in the disruption of Internet operations, the inability of any user to communicate with another user or delay infrastructure improvements necessary to the maintenance and expansion of the Internet. The role, if any, that the NSF will play in the future of the Internet and the legal authority underlying any such continuing role are at present unclear. Withdrawal of the NSF's sponsorship of the Company's activities or the various entities participating in the administration of the Internet could create a public perception that the Company lacks authority to continue in its 50 52 role as registrar or to charge fees for its domain name registration services. The impact, if any, of this public perception is unknown but could materially and adversely affect the Company's business, financial condition and results of operations. See "-- Relationship with the NSF; Recent Developments in the Internet Community" and "Risk Factors -- Uncertain Status of the Cooperative Agreement; Recommendations and Proposals to Increase Competition in Registration Services." The current lack of any centralized Internet management could also cause the U.S. federal or other governments to intervene with uncertain results. The U.S. government has formed an interagency task force ("ITF") consisting of various federal agencies to study the issues surrounding domain name registration and governance of the Internet. The ITF is expected to solicit broad public input to these and other issues. This process is expected to be completed in early 1998. The outcome of this activity could have a material adverse effect on the Company's business, financial condition and results of operations. In the United States, apart from its obligations under the Cooperative Agreement, the Company is not currently subject to direct regulation other than federal and state regulation applicable to businesses generally. However, changes in the regulatory environment relating to the telecommunications and media industry could result in the Company being subject to direct regulation, in which case the Company's business, financial condition and results of operations could be materially and adversely affected. The Company is aware of certain industry requests of the FCC to review the impact of Internet usage on the U.S. telecommunications service providers, in particular, the generally lower cost structure for data transmission versus voice. FCC regulatory review and rulemaking could result in new regulation of the Internet industry, changes in current rules governing telecommunications or both. In addition, as the Internet becomes more widespread internationally, there is an increased likelihood of international regulation. The Company cannot predict whether or to what extent any such new rulemaking or regulation will occur and what impact, if any, it would have on the Company's business, financial condition and results of operations. Additionally, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, ISPs could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. The future interpretation by the courts of the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. See "-- Litigation" and "Risk Factors -- Litigation." Costs incurred or decisions rendered as a result of government investigations or lawsuits relating to any of the foregoing could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Government Regulation and Legal Uncertainties." LITIGATION As of June 30, 1997, the Company had received approximately 2,500 written objections to the registration and use of certain domain names. Of these, approximately 1,200 were disputes in which the Company's domain name dispute policy was involved. As of June 30, 1997, the Company had been named as a defendant in 26 lawsuits. As of such date, the Company has been dismissed as a party from 21 of the 26 lawsuits and no damages have been awarded against the Company to any plaintiff. The lawsuits have generally involved domain name disputes between trademark owners and domain name holders. The Company's domain name dispute policy seeks to take a neutral position regarding these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's federal trademark. The Company is drawn into such disputes, in part, as a result of claims by trademark owners that the Company is legally required, upon request by a trademark owner, to terminate the right it granted to an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their federally registered trademark. The holders of the domain name 51 53 registrations in dispute, have, in turn, questioned the Company's right, absent a court order, to take any action which suspends their registration or use of the domain names in question. Such litigation has resulted in, and any future litigation can be expected to result in, substantial legal and other expenses to the Company and a diversion of the efforts of the Company's personnel. Currently, domain name registration requests are allocated by the Company on a first-come, first-serve basis. The Company's domain name dispute policy is triggered when the Company is presented with a certified copy of a federal trademark certificate, proof that the trademark owner gave prior notice to the domain name registrant and an allegation of legal harm to the trademark owner. This policy provides for a detailed set of procedures designed to facilitate the resolution of such disputes between the parties. The policy also provides for the Company to be indemnified for any damages arising in connection with any litigation arising out of a dispute between claimants regarding the registration of a domain name. The Company bears its own costs and expenses associated with any litigation. On June 27, 1997, SAIC received a CID from the DOJ issued in connection with an investigation to determine whether there is, has been, or may be a violation of antitrust laws under the Sherman Act relating to Internet registration products and services. The CID seeks documents and information from SAIC and the Company relating to their Internet registration business. Neither SAIC nor the Company is aware of the scope or nature of the investigation. The Company cannot predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or entered as a result of any settlement between the Company and the DOJ or private litigants. Any such relief could have a material adverse effect on the Company's business, financial condition and results of operations. On March 20, 1997, PG Media filed a lawsuit against the Company in the United States District Court, Southern District of New York alleging that the Company had restricted access to the Internet by not adding TLDs in violation of the Sherman Act. The Company has answered the complaint, but no motions are pending and no schedule has yet been set by the court for these proceedings. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. Although the Company believes that it has meritorious defenses and intends to vigorously defend itself against such claims, a successful claim under the plaintiff's theory could have a material adverse effect on the Company's business, financial condition and results of operations. There can be no assurance that the Company will not be involved in additional litigation, investigations or other proceedings in the future. Any such proceedings, with or without merit, could be costly and time-consuming to defend, could divert management's attention and resources and could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Litigation." INTELLECTUAL PROPERTY RIGHTS The Company's principal intellectual property consists of, and its success is dependent upon, the Company's proprietary software utilized in its registration services business and certain methodologies and technical expertise it utilizes in both the design and planned implementation of its current and future registration service and proposed enabling services businesses. Some of the software and protocols used by the Company in its registration service and proposed directory service businesses are in the public domain or are otherwise available to the Company's competitors. In addition, in-depth technical knowledge and unique processes are critical to the Company's Intranet services business, in which a full range of consulting and systems integration services are offered in order to transition organizations from private, legacy networks to more scalable and efficient Intranets. The Company has no patents or registered copyrights but has several trademarks and service marks, including the Company's logo. 52 54 The Company has compiled a database of information relating to customers in its registration business. While a portion of this database is available to the public, the Company believes that it has ownership rights in this database and is seeking to protect such rights. If it were determined that the Company does not have ownership rights in this database or if the Company is unable to protect such rights in this database or is required to share the database with its potential competitors, any such development would have a material adverse effect on the Company's business, financial condition and results of operations. The Company relies upon a combination of nondisclosure and other contractual arrangements with its employees and third parties and trade secret laws to protect its proprietary rights and limit the distribution of its proprietary information. There can be no assurance that the steps taken by the Company in this regard will be adequate to deter misappropriation of proprietary information or that the Company will be able to detect unauthorized use of its proprietary information and take appropriate steps to enforce its intellectual property rights. Furthermore, even if these steps are successful, there can be no assurance that others will not develop technologies that are similar or superior to the Company's proprietary technology. Although the Company believes that its services do not infringe on the intellectual property rights of others and that it has all rights necessary to utilize the intellectual property employed in its business, the Company is subject to the risk of claims alleging infringement of third party intellectual property rights. Any such claims could require the Company to spend significant sums in litigation, pay damages and develop non-infringing intellectual property or acquire licenses to the intellectual property which is the subject of asserted infringement. Failure by the Company to adequately protect its proprietary rights, or litigation relating to intellectual property rights, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors -- Intellectual Property Rights." EMPLOYEES As of June 30, 1997, the Company had approximately 220 full-time employees. None of the Company's employees are covered by collective bargaining agreements. The Company believes that its relations with its employees are good. FACILITIES The Company's principal executive office is located in Herndon, Virginia, in a 45,000 square foot facility subleased from SAIC under a sublease expiring in November 2002. The Company also leases an additional 31,000 square feet in a facility in Herndon, Virginia under a lease expiring in July 2002 and subleases a 10,000 square foot facility from SAIC under a sublease expiring in October 1999. Additionally, the Company leases approximately 10,000 square feet in a facility in Charlotte, North Carolina, with portions of the sublease expiring in August 1998 and July 2002. The Company believes that its current facilities will be adequate for the next 12 months and that any additional facilities will be available in the future as needed on commercially reasonable terms. 53 55 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Executive officers and directors of the Company and their ages as of June 30, 1997 are as follows:
NAME AGE POSITION - ------------------------------------- --- ------------------------------------------------- Gabriel A. Battista.................. 52 Chief Executive Officer and Director Michael A. Daniels................... 51 Chairman of the Board Robert J. Korzeniewski............... 40 Chief Financial Officer Raymond S. Corson.................... 51 Senior Vice President, Business Development David H. Holtzman.................... 40 Senior Vice President, Engineering Donald N. Telage..................... 52 Senior Vice President, Internet Relations and Special Programs and Director A. Scott Williamson.................. 39 Vice President, Engineering Michael G. Voslow.................... 37 Treasurer Russell L. Helbert................... 40 Controller J. Robert Beyster.................... 72 Director Craig I. Fields...................... 50 Director John E. Glancy....................... 51 Director William A. Roper, Jr................. 51 Director Stratton D. Sclavos.................. 35 Director
- ------------------------------ (1) Member of Compensation Committee. (2) Member of Audit Committee. Gabriel A. Battista has served as Chief Executive Officer of the Company since October 1996 and as a director of the Company since November 1996. From September 1995 to October 1996, Mr. Battista served as President and Chief Executive Officer of Cable & Wireless, Inc., a telecommunications company and U.S. subsidiary of Cable & Wireless, P.L.C. From 1991 to 1995, Mr. Battista served as President and Chief Operating Officer of Cable & Wireless, Inc. and from 1987 to 1991, he served as the Chief Operating Officer of National Telephone Services, a long distance operator service company. Mr. Battista also serves as a director of Axent Technologies, Inc. and Systems & Computer Technology Corporation. Mr. Battista received a BSEE from Villanova University, an MSEE from Drexel University and an MBA from Temple University. Michael A. Daniels has served as Chairman of the Board of the Company since May 1995. Since 1986, Mr. Daniels has served in various positions with SAIC and has served as a Sector Vice President and Sector Manager for the Technology Applications Sector of SAIC since 1993. Prior thereto, Mr. Daniels served as a Group Senior Vice President of SAIC from 1991 to 1993. Mr. Daniels received a B.S. and an M.A. from Northwestern University and received a J.D. from the University of Missouri School of Law. Robert J. Korzeniewski has been Chief Financial Officer of the Company since March 1996. Since 1987, Mr. Korzeniewski has held a variety of senior financial positions with SAIC and has served as a Corporate Vice President for Administration of SAIC since 1989. Prior to SAIC, Mr. Korzeniewski was the Corporate Controller of Halifax Corporation, a publicly traded technology services company. Mr. Korzeniewski is a Certified Public Accountant and received a B.S. in Business Administration from Salem State College. Raymond S. Corson has served as Senior Vice President, Business Development, of the Company since July 1996. Mr. Corson has also served as a Vice President of SAIC since 1995. Since 1987, Mr. Corson served in various positions with the Company, including serving as Vice President of Marketing from March 1995 to July 1996, Vice President of Operations from January 1994 to 54 56 March 1995 and Vice President of Network Support Services from July 1989 to January 1994. Prior to joining the Company, Mr. Corson served as Department Manager of Command, Control, and Intelligence in Unisys' Defense Systems. Mr. Corson attended Virginia Polytechnic Institute and State University from 1963 through 1966, majoring in Economics. David H. Holtzman has served as Senior Vice President for Product Development and Technology of the Company since February 1997. From September 1995 until January 1997, he served as Chief Scientist, IBM Internet Information Technology (InfoMarket) group. Prior to this, he served as a Senior Associate at Booz-Allen & Hamilton. Mr. Holtzman has a B.A. in Philosophy from the University of Pittsburgh and a B.S. in Computer Science from the University of Maryland. Donald N. Telage has served as Senior Vice President of Internet Relations and Special Programs since February 1997 and as a director since May 1995. Dr. Telage also served as President and Chief Operating Officer of the Company from May 1995 to February 1997. Since 1986, Dr. Telage has served in various positions with SAIC and has served as a Group Senior Vice President of SAIC since 1993. Prior thereto, Dr. Telage served as a Corporate Vice President of SAIC from 1992 to 1993. Dr. Telage received his B.A. in Psychology from the University of Connecticut and received an M.A. and a Ph.D. in Mathematics from Clark University. A. Scott Williamson rejoined the Company as Vice President, Directory Services, in March 1996 and has served as Vice President, Engineering, of the Company since November 1996. Mr. Williamson has also served as a Vice President of SAIC since 1996. Prior to rejoining the Company, Mr. Williamson served as Thomson Technology Internet Lab's Principal Researcher for the Thomson Corporation, a publishing company, from January 1995 to March 1996. Mr. Williamson originally joined the Company in 1985 and served in a variety of positions, including serving as a program manager from January 1992 to December 1994. Mr. Williamson received an A.A. from Northern Virginia Community College. Michael G. Voslow has served as Treasurer of the Company since January 1997. From January 1995 to January 1997, Mr. Voslow was Vice President and Corporate Controller for MAXM Systems Corporation ("MAXM"), a worldwide provider of computer software and professional services. Prior to joining MAXM, Mr. Voslow was a Senior Manager at Price Waterhouse where he served from August 1983 to January 1995. Mr. Voslow is a Certified Public Accountant and received a B.S. in Business Administration from Miami University (Ohio) and an M.B.A. in Finance from Duke University. Russell L. Helbert has served as Controller of the Company since December 1990 and as Manager of Finance for the Company since August 1985. Mr. Helbert has also served as an Assistant Vice President for Administration of SAIC since 1995. Prior to joining the Company, Mr. Helbert was a Division Controller with Browning-Ferris, Industries, a waste management services company. Mr. Helbert received his B.A. in Business Administration from the University of Buffalo. J. Robert Beyster has served as a director of the Company since November 1996. Dr. Beyster is the Chief Executive Officer and Chairman of the Board of SAIC, a company he founded in 1969. Dr. Beyster is a Fellow of the American Nuclear Society and a Fellow of the American Physical Society. Dr. Beyster is also the founder, President and a member of the Board of Trustees of the Foundation for Enterprise Development, a non-profit organization that promotes employee ownership. Dr. Beyster received his B.S.E. in Engineering and Physics and an M.S. and Ph.D. in Nuclear Physics from the University of Michigan. Craig I. Fields has served as a director of the Company since January 1997. Dr. Fields has served as a consultant to SAIC since 1994. Prior thereto, Dr. Fields served as Vice Chairman of Alliance Gaming Corporation, a diversified entertainment company, from 1994 to 1997. From 1990 until 1994, Dr. Fields served as Chairman and Chief Executive Officer of the Microelectronics and Computer Technology Corporation, a research and development consortium. In addition, Dr. Fields serves as a director of ENSCO International Incorporated, Projectavision, Inc., Perot Systems Corporation, Muzak Incorporated, Intertech and Firearms Training Systems, Inc. Dr. Fields received a B.S. from the Massachusetts Institute of Technology and a Ph.D. from the Rockefeller University. 55 57 John E. Glancy has served as a director of the Company since July 1996. Dr. Glancy has held a number of senior positions with SAIC since February 1980. Dr. Glancy has served as a Corporate Executive Vice President of SAIC since January 1994 and as a director of SAIC since July 1994. From April 1991 until January 1994, Dr. Glancy served as a Sector Vice President of SAIC. Dr. Glancy received a B.S. in Physics from the University of Pittsburgh, an M.S. degree in Nuclear Engineering from Cornell University and a Ph.D. in Applied Physics from Cornell University. William A. Roper, Jr. has served as a director of the Company since July 1996. Since April 1990, Mr. Roper has served as Senior Vice President and Chief Financial Officer of SAIC. Mr. Roper received a B.A. in Mathematics from the University of Mississippi. Stratton D. Sclavos has served as a director of the Company since January 1997. Mr. Sclavos has served as the President and Chief Executive Officer of VeriSign, Inc. since July 1995. From 1994 until July 1995, Mr. Sclavos served as Vice President of Worldwide Marketing and Sales for Taligent, Inc., a joint venture of Apple Computer, Inc., IBM Corporation and The Hewlett-Packard Company, Inc. From 1992 until 1993, Mr. Sclavos served as Vice President of Worldwide Sales and Business Development for GO Corporation, a mobile computing company. From 1988 until 1993, Mr. Sclavos served in various executive positions with MIPS Computers Systems. Mr. Sclavos received a B.S. in Electrical and Computer Engineering from the University of California, Davis. The Company currently has authorized eight (8) directors. All directors are elected to hold office until the next annual meeting of stockholders of the Company and until their successors have been elected. Officers are elected at the first board of directors meeting following the stockholders' meeting at which the directors are elected and serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. COMPENSATION OF DIRECTORS The Company's non-employee directors ("Outside Directors") currently receive no cash fees as part of their compensation. All directors are reimbursed for expenses incurred in connection with attending Board and committee meetings. The Company's 1996 Stock Incentive Plan provides that the Board of Directors may determine to allow an Outside Director to elect to receive his or her annual retainer payments and meeting fees from the Company in the form of cash, NSOs, Stock Units or a combination thereof. The number of NSOs to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash will be calculated in a manner determined by the Board of Directors. The number of Stock Units to be granted to Outside Directors will be calculated by dividing the amount of the annual retainer or the meeting fee that would otherwise be paid in cash by the arithmetic mean of the fair market values of one share of Common Stock on the 10 consecutive trading days ending with the date such retainer or fee is payable. In January 1997, Craig I. Fields and Stratton D. Sclavos each received NSOs to purchase 30,750 shares of the Company's Class A Common Stock with exercise prices of $14.00 per share (which was equal to 100% of the fair market value on the date of grant). All such stock options become exercisable one year after the date of grant and vest as to 30%, 30%, 20% and 20% on the first, second, third and fourth year anniversaries of the date of grant, respectively. 56 58 EXECUTIVE COMPENSATION The following table summarizes all compensation earned by or paid to the Company's current and former Chief Executive Officer and to each of the Company's four most highly compensated executive officers other than the Chief Executive Officer whose total annual salary and bonus exceeded $100,000 for services rendered in all capacities to the Company and SAIC during the fiscal year ended December 31, 1996 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION -------------------------------- ANNUAL COMPENSATION RESTRICTED SECURITY ---------------------- STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) AWARDS ($)(1) OPTIONS (#)(2) COMPENSATION ($) - ---------------------------------------- ---------- --------- ------------- -------------- ---------------- Gabriel A. Battista(3).................. 60,577 37,500 -- 461,250 -- Chief Executive Officer Donald N. Telage........................ 165,719 35,010(4) 29,984(5) 153,750 13,209(6) Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski.................. 120,731 20,011 19,989(7) 115,300 9,954(6) Chief Financial Officer Raymond S. Corson....................... 118,519 7,524 7,476(8) 30,750 9,815(6) Senior Vice President, Business Development Emmit J. McHenry(9)..................... 17,523 -- -- -- 875,011(10)
- ------------------------------ (1) The amount reported represents the market value on the date of grant (calculated by multiplying the Formula Price of SAIC's Class A Common Stock on the date of grant by the number of shares awarded), without giving effect to the diminution in value attributable to the restriction on such stock. As of December 31, 1996, the aggregate restricted stock holding of SAIC Class A Common Stock for the Named Executive Officers were as follows: Gabriel A. Battista -- none; Donald N. Telage -- 1,930 shares, with a market value as of such date of $44,062; Robert J. Korzeniewski -- 261 shares, with a market value as of such date of $5,959; Raymond S. Corson -- 220 shares, with a market value as of such date of $5,023; Emmit J. McHenry -- none; and all other employees -- 571,260 shares, with a market value as of such date of $13,041,866. Dividends are payable on such restricted stock if and when declared. However, SAIC has never declared or paid a cash dividend on its capital stock and no cash dividends on its capital stock are contemplated in the foreseeable future. (2) Represents options to acquire shares of the Company's Class A Common Stock. (3) Gabriel A. Battista joined the Company in October 1996. Mr. Battista's annual salary for 1996 would have been $350,000. (4) Includes the award of 193 shares of SAIC Class A Common Stock which had a market value on the date of grant (calculated by multiplying the Formula Price of the SAIC Class A Common Stock on the date of grant by the number of shares awarded) of $5,010. (5) Represents 1,155 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (6) Represents amounts contributed by SAIC for the Named Executive Officers under SAIC's Cash or Deferred Arrangement, SAIC's Profit Sharing Plan and SAIC's Employee Stock Ownership Plan. (7) Represents 770 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (8) Represents 288 shares of SAIC Class A Common Stock which vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. (9) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. (10) Represents amounts paid to Emmit J. McHenry in connection with the settlement of an earnout, covenant not to compete and other agreements. 57 59 STOCK OPTION GRANTS The following table summarizes options to acquire shares of the Company's Class A Common Stock granted during the Company's fiscal year ended December 31, 1996 to the Company's Named Executive Officers. The amounts shown as potential realizable values on the options identified in the table are based on assumed annualized rates of appreciation in the price of the Company's Class A Common Stock of five percent and ten percent over the term of the options, as set forth in the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises are dependent upon the future performance of the Company's Class A Common Stock. There can be no assurance that the potential realizable values reflected in this table will be achieved. No stock appreciation rights were granted during the Company's 1996 fiscal year. NSI OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE NUMBER OF VALUE AT ASSUMED SECURITIES PERCENTAGE OF ANNUAL RATES OF STOCK UNDERLYING TOTAL OPTIONS PRICE APPRECIATION FOR OPTIONS GRANTED TO EXERCISE OR OPTION TERM($)(5) GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ------------------------- NAME (#)(1) 1996(2) ($/SHARE)(3) DATE(4) 5% 10% - ---------------------------------- ---------- ------------- ------------- ---------- ---------- ---------- Gabriel A. Battista............... 461,250 37.6 11.25 10/14/01 1,433,642 3,167,975 Chief Executive Officer Donald N. Telage.................. 153,750 12.5 14.00 11/24/01 594,696 1,314,123 Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski............ 115,300 9.4 14.00 11/24/01 445,974 985,485 Chief Financial Officer Raymond S. Corson................. 30,750 2.5 14.00 11/24/01 118,939 262,825 Senior Vice President, Business Development Emmit J. McHenry(6)............... -- -- -- -- -- --
- ------------------------------ (1) The stock options become exercisable one year after the date of grant and vest as to 30%, 30%, 20% and 20% on the first, second, third and fourth year anniversaries of the date of grant, respectively. Under the terms of the Company's 1996 Stock Incentive Plan (the "Stock Plan"), the committee designated by the Board of Directors to administer the Stock Plan retains the discretion, subject to certain limitations within the Stock Plan, to modify, extend or renew outstanding options and to reprice outstanding options. Options may be repriced by canceling outstanding options and reissuing new options with an exercise price equal to the fair market value on the date of reissue, which may be lower than the original exercise price of such canceled options. (2) Based on options to purchase an aggregate of 1,225,725 shares of Class A Common Stock granted to NSI employees in 1996, including the Named Executive Officers. (3) The exercise price on the date of grant was equal to 100% of the fair market value on the date of grant. The exercise price may be paid in cash, check, by delivery of already-owned shares of the Company's Class A Common Stock subject to certain conditions, or pursuant to a cashless exercise procedure under which the optionee provides irrevocable instructions to a brokerage firm to sell the purchased shares and to remit to the Company, out of the sale proceeds, an amount equal to the aggregate exercise price plus all applicable withholding taxes. (4) The options have a term of 5 years, subject to earlier termination in certain events related to termination of employment. (5) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future Common Stock price. There can be no assurance that any of the values reflected in the table will be achieved. (6) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 58 60 The following table summarizes options to acquire shares of SAIC Class A Common Stock granted during the Company's fiscal year ended December 31, 1996 to the Company's Named Executive Officers. The amounts shown as potential realizable values on the options identified in the table are based on assumed annualized rates of appreciation in the price of SAIC Class A Common Stock of five percent and ten percent over the term of the options, as set forth in the rules of the Securities and Exchange Commission. Actual gains, if any, on stock option exercises are dependent upon the future performance of SAIC Class A Common Stock. There can be no assurance that the potential realizable values reflected in this table will be achieved. No SAIC stock appreciation rights were granted during the Company's 1996 fiscal year. SAIC OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK NUMBER OF PERCENTAGE OF PRICE APPRECIATION SECURITIES TOTAL OPTIONS FOR UNDERLYING GRANTED TO EXERCISE OR OPTION TERM($)(5) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED (#)(1) FISCAL YEAR(2) ($/SHARE)(3) DATE(4) 5% 10% - --------------------------------- -------------- -------------- ------------ ---------- ------ ------ Gabriel A. Battista.............. -- -- -- -- -- -- Chief Executive Officer Donald N. Telage................. 7,000 * 19.33 3/28/01 37,384 82,608 Senior Vice President, Internet Relations and Special Programs Robert J. Korzeniewski........... 5,100 * 19.33 3/28/01 27,237 60,186 Chief Financial Officer Raymond S. Corson................ 810 * 19.33 2/08/01 4,326 9,559 Senior Vice President, 1,000 * 19.33 3/28/01 5,341 11,801 Business Development Emmit J. McHenry(6).............. -- -- -- -- -- --
- ------------------------------ * Less than 1% of the total options granted to employees in 1996. (1) Although the following grants of options were made during 1996, such grants relate to the individual's service during 1995. These non-qualified stock options become exercisable one year after the date of grant and vest as to 20%, 20%, 20% and 40% on the first, second, third and fourth year anniversaries of the date of grant, respectively. Under the terms of SAIC's 1995 Stock Option Plan (the "Stock Plan"), the committee designated by the Board of Directors to administer the Stock Plan retains the discretion, subject to certain limitations within the Stock Plan, to modify, extend or renew outstanding options and to reprice outstanding options. Options may be repriced by canceling outstanding options and reissuing new options with an exercise price equal to the fair market value on the date of reissue, which may be lower than the original exercise price of such canceled options. (2) Based on options to purchase an aggregate of 3,581,132 shares granted to employees, consultants and directors of SAIC and its subsidiaries in 1996, including the Company's Named Executive Officers. (3) The exercise price on the date of grant was equal to 100% of the fair market value on the date of grant. (4) The options have a term of 5 years, subject to earlier termination in certain events related to termination of employment. (5) The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of the future price of the SAIC Class A Common Stock. There can be no assurance that any of the values reflected in the table will be achieved. (6) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 59 61 The following table summarizes the value realized on the exercise of options to acquire SAIC Class A Common Stock during the fiscal year ended December 31, 1996. No options to acquire shares of the Company's Common Stock were exercised during the Company's 1996 fiscal year. The following table also presents the number and value of unexercised options to acquire SAIC Class A Common Stock and unexercised options to acquire the Company's Common Stock as of December 31, 1996 for the Company's Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($) SHARES ACQUIRED VALUE ---------------------------- ------------------------------ NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - --------------------- --------------- ------------ ------------ ------------- ------------ --------------- Gabriel A. --(N) --(N) --(N) 461,250(N) --(N) 1,268,438(N)(2) Battista............. --(S) --(S) --(S) --(S) --(S) --(S) Chief Executive Officer Donald N. Telage..... --(N) --(N) --(N) 153,750(N) --(N) --(N)(2) Senior Vice 6,100(S) 60,771(S)(1) 4,580(S) 14,970(S) 40,887(S)(3) 89,138(S)(3) President, Internet Relations and Special Programs Robert J. --(N) --(N) --(N) 115,300(N) --(N) --(N)(2) Korzeniewski......... --(S) --(S) 9,000(S) 14,100(S) 91,310(S)(3) 90,530(S)(3) Chief Financial Officer Raymond S. Corson.... --(N) --(N) --(N) 30,750(N) --(N) --(N)(2) Senior Vice --(S) --(S) 200(S) 2,610(S) 1,284(S)(3) 11,471(S)(3) President, Business Development Emmit J. McHenry(4).. --(N) --(N) --(N) --(N) --(N) --(N)(2) --(S) --(S) 2,000(S) 8,000(S) 12,840(S)(3) 51,360(S)(3)
- ------------------------------ (N) Options to acquire the Company's Class A Common Stock. (S) Options to acquire SAIC's Class A Common Stock. (1) Calculated by multiplying the difference between the Formula Price of SAIC's Class A Common Stock underlying the option as of the date of exercise and the exercise price of the option by the number of shares of SAIC's Class A Common Stock acquired on exercise of the option. (2) Based on the fair market value of the Company's Class A Common Stock as of such date less the exercise price of such options. (3) Based on the Formula Price of SAIC's Class A Common Stock as of such date less the exercise price of such options. (4) Emmit J. McHenry served as Chief Executive Officer of the Company until January 1996. 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan (the "Incentive Plan") of the Company was adopted by the Board of Directors and approved by the Company's stockholder on September 18, 1996. The Incentive Plan provides for awards in the form of restricted shares, stock units, options (including incentive stock options ("ISOs") and nonstatutory stock options ("NSOs")) or stock appreciation rights ("SARs"). Employees, Outside Directors, consultants and advisors of the Company are eligible for the grant of restricted shares, stock units, SARs and NSOs. Only employees are eligible for the grant of ISOs. The Outside Directors may elect to receive any director fees in NSOs, stock units or a combination thereof. As of June 30, 1997, a total of 2,556,250 shares of Common Stock has been reserved for issuance under the Incentive Plan. The Incentive Plan will be amended to reflect two classes of Common Stock. The Incentive Plan will be administered by a Compensation Committee and a Non-Insider Option Committee. The Compensation Committee will consist of at least two directors who are "non-employee directors," as defined in Rule 16b-3. The Board of Directors may amend the Incentive Plan as desired without further action by the Company's stockholders except as required by applicable law. 60 62 The Incentive Plan will continue in effect until terminated by the Board or, with respect to ISOs, for a term of 10 years from its original adoption date, whichever is earlier. The consideration for each award under the Incentive Plan will be established by the Compensation Committee, but in no event will the option price for ISOs be less than 100% of the fair market value of the stock on the date of grant. Awards will have such terms and be exercisable in such manner and at such times as the Compensation Committee may determine. However, each ISO must expire within a period of not more than ten (10) years from the date of grant. The Incentive Plan provides that, in the event of a merger or reorganization of the Company, outstanding options, SARs, restricted shares and stock units shall be subject to the terms of the agreement of merger or reorganization. As of June 30, 1997, a total of 100,900 ISOs and 1,395,825 NSOs have been granted under the Incentive Plan. Such options have exercise prices ranging from $11.25 to $14.00 per share and a weighted average per share exercise price of $13.15 and were held by 71 persons. None of such options has been exercised. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS The Company does not currently have any employment contracts in effect with any of the Named Executive Officers other than Gabriel A. Battista, the Company's Chief Executive Officer. The Company and Mr. Battista are parties to a letter agreement dated September 24, 1996 governing his employment with the Company. The agreement sets forth Mr. Battista's compensation level and eligibility for bonuses, benefits and option grants under the 1996 Stock Incentive Plan. Pursuant to the agreement, if Mr. Battista's employment is terminated for other than cause or non-performance, Mr. Battista will be eligible to receive, if terminated during his first year of employment, his first year base salary and an additional $150,000 in bonus, and, if terminated during his second year of employment, his first year base salary and an amount equal to the bonus awarded to him for his first year of employment. If Mr. Battista resigns during this initial two-year period, he will not receive any separation compensation. Mr. Battista's employment under the letter agreement is voluntary and may be terminated by the Company or Mr. Battista at any time with or without cause or notice. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company has adopted provisions in its Certificate of Incorporation that limit the liability of its directors for monetary damages for breach of their fiduciary duty as directors, except for liability that cannot be eliminated under the Delaware General Corporation Law (the "Delaware Law"). The Delaware Law provides that directors of a company will not be personally liable for monetary damages for breach of their fiduciary duty as directors, except for liability (i) for any breach of their duty of loyalty to the Company or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividend or unlawful stock repurchase or redemption, as provided in section 174 of the Delaware Law, or (iv) for any transaction from which the director derived an improper personal benefit. Any amendment or repeal of these provisions requires the approval of the holders of shares representing at least 66-2/3% of the shares of the Company entitled to vote in the election of directors, voting as one class. The effect of these provisions will be to eliminate the rights of the Company and its stockholders (through stockholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director (including breaches resulting from grossly negligent behavior), except in the situations described above. The Company's Certificate of Incorporation and Bylaws also provide that the Company shall indemnify its directors and officers to the fullest extent permitted by the Delaware Law. The Company intends to enter into separate indemnification agreements with its directors that could require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. The Company believes that the limitation of 61 63 liability provision in its Restated Certificate of Incorporation and the indemnification agreements will facilitate the Company's ability to continue to attract and retain qualified individuals to serve as directors and officers of the Company. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER INFORMATION Compensation information with respect to the Named Executive Officers for 1996 reflects compensation earned while the Company was a wholly-owned subsidiary of SAIC. During 1996, the Company had no Compensation Committee. Executive compensation levels during 1996 were established by SAIC. The Company intends to establish a Compensation Committee for fiscal 1997 which will consist of persons, of whom are independent directors of the Company and of whom are officers of the Company. 62 64 RELATIONSHIP WITH SAIC AND CERTAIN TRANSACTIONS The Company was acquired by SAIC, an employee-owned, diversified professional and technical services company, on March 10, 1995. The Company is currently a wholly-owned subsidiary of SAIC. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock ( shares), which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full) and approximately % of the combined voting power of the Company's outstanding Common Stock (approximately % if the Underwriters' over-allotment option is exercised in full) and thus will continue to have the ability to elect all of the directors of the Company and otherwise exercise a controlling influence over the business and affairs of the Company. Prior to the acquisition of the Company by SAIC, the Company's business included commercial and government contracts awarded to the Company on a competitive basis, including government contracts that were awarded to the Company based partially upon the Company's then minority-owned status. The contracts which had been awarded to the Company based on the Company's then minority-owned status were transferred into a separately-owned entity prior to acquisition of the Company by SAIC. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to enable the Company to focus on the growth of its commercial business, which includes registration services and Intranet services. Such transfer was effective as of February 1996. The operating results of both the minority-based government contracts business, and the remaining government-based business are reflected as discontinued operations in the Company's financial statements for all periods presented. For as long as SAIC continues to own shares of Common Stock representing more than 50% of the voting power of the Common Stock of the Company, SAIC will be able, among other things, to determine the outcome of any corporate action requiring approval of holders of Common Stock representing a majority of the voting power of the Common Stock, including the election of the entire Board of Directors of the Company, without the consent of the other stockholders of the Company. In addition, through its control of the Board of Directors and ownership of Common Stock, SAIC will be able to control certain decisions, including decisions with respect to the Company's dividend policy, the Company's access to capital (including borrowing from third party lenders and the issuance of additional equity securities), mergers or other business combinations involving the Company, the acquisition or disposition of assets by the Company and any change in control of the Company. SAIC has advised the Company that its current intent is to continue to hold all of its outstanding shares of Class B Common Stock. Further, pursuant to the Underwriting Agreement, SAIC has agreed, subject to certain exceptions, not to sell or otherwise dispose of any shares of Common Stock (or any security convertible into or exchangeable or exercisable for Common Stock) owned by it for a period of 180 days following the date of this Prospectus without the prior written consent of Hambrecht & Quist LLC. However, after such 180 day period, there can be no assurance concerning the period of time during which time SAIC will maintain its ownership of Class B Common Stock. Beneficial ownership of at least 80% of the total voting power and value of the outstanding Common Stock is required in order for SAIC to continue to include the Company in its consolidated group for federal income tax purposes, and ownership of at least 80% of the total voting power and 80% of each class of nonvoting capital stock is required in order for SAIC to be able to effect a tax-free spin-off of the Company under the Code. See "Description of Capital Stock -- Common Stock -- Conversion Rights." The Company's Amended and Restated Certificate of Incorporation contains provisions relating to competition by SAIC with the Company, potential conflicts of interest that may arise between the Company and SAIC, the allocation of business opportunities that may be suitable for either SAIC or the Company and the approval of transactions between the Company and SAIC. The Company's Amended and Restated Certificate of Incorporation also limits the liability of its directors for monetary damages arising from a breach of their fiduciary duty as directors, except to the extent otherwise required by the Delaware General Corporations Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. 63 65 The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. The Company has also entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. The Company's relationship with SAIC will also be governed by the following agreements to be entered into prior to completion of the offering: corporate services agreement, noncompetition agreement, registration rights agreement and tax sharing agreement, the material terms of which are summarized below. Because the Company is a wholly-owned subsidiary of SAIC, none of these arrangements will result from arm's length negotiations and, therefore, the prices charged to the Company for services provided thereunder may be higher or lower than prices that may be charged by third parties. The descriptions of agreements set forth below are intended to be summaries and, while material terms of the agreements are set forth herein, the descriptions are qualified in their entirety by reference to the relevant agreements filed as exhibits to the Registration Statement of which this Prospectus forms a part. CORPORATE SERVICES AGREEMENT Prior to the completion of the offering, the Company and SAIC will enter into a corporate services agreement (the "Corporate Services Agreement") pursuant to which SAIC will provide to the Company from time to time, upon request of the Company, certain routine and ordinary corporate services, including financial, insurance, accounting, employee benefits, payroll, tax and legal services. SAIC will also provide strategic corporate planning services as described in the Corporate Services Agreement. For these services, the Company is assessed a fee equal to 2.5% of the Company's annual net revenues. With respect to matters covered by the Corporate Services Agreement, the relationship between SAIC and the Company is intended to continue in a manner generally consistent with past practices. The Company believes that the charges under the Corporate Services Agreement are reasonable. The initial term of this agreement will be one year. Thereafter, the Corporate Services Agreement will be automatically renewed for successive one-year terms until terminated and may be terminated by either party upon 180 days' prior written notice. NONCOMPETITION AGREEMENT Prior to the completion of the offering, the Company and SAIC will enter into a noncompetition agreement (the "Noncompetition Agreement") pursuant to which SAIC agrees that it will not compete with the Company in the domain name registration business within the .com, .org, .net, .edu and .gov TLDs for a period of five years. REGISTRATION RIGHTS AGREEMENT Prior to the completion of the offering, the Company and SAIC will execute a Registration Rights Agreement pursuant to which SAIC may, on not more than two occasions, demand registration under the Securities Act of some or all of the shares of Class A Common Stock to be owned by SAIC upon conversion of the Class B Common Stock owned by SAIC or any other shares of Class A Common Stock acquired by SAIC, subject to its agreement not to sell any shares prior to the expiration of 180 days from the date of this Prospectus. The first such registration will be at the Company's expense and the second such registration will be at SAIC's expense. The Company may postpone such a demand under certain circumstances. In addition, SAIC may request the Company to include shares of the Class A Common Stock held by SAIC in any registration proposed by the Company of such Class A Common Stock under the Securities Act. See "Description of Capital Stock -- Registration Rights." 64 66 TAX SHARING AGREEMENT The taxable income and losses of the Company will be included in the consolidated federal income tax returns filed by SAIC's consolidated group for so long as SAIC maintains beneficial ownership of at least 80% of the total voting power and value of the outstanding Common Stock of the Company. Prior to the completion of the offering, the Company and SAIC plan to enter into a tax sharing agreement (the "Tax Sharing Agreement") which will require the Company to pay SAIC an amount in respect of federal income taxes generally equal to the amount of the federal income taxes that the Company generally would be required to pay if the Company were to file its own federal income tax return and was never part of SAIC's consolidated group. Effectively, this will result in the Company's annual income tax payable/receivable being computed as if the Company filed a separate tax return. Further, pursuant to the terms of the Tax Sharing Agreement, upon deconsolidation, the Company's ability to recognize a benefit for tax losses it incurs is subject to SAIC's approval. SAIC may choose to contest, compromise or settle any adjustment or deficiency proposed by the relevant taxing authority in a manner that may be beneficial to SAIC and detrimental to the Company. In general, the Company will be included in SAIC's consolidated group for federal income tax purposes for so long as SAIC beneficially owns at least 80% of the total voting power and value of the outstanding Common Stock. Each member of a consolidated group is jointly and severally liable for the federal income tax liability of each other member of the consolidated group. Accordingly, although the Tax Sharing Agreement allocates tax liabilities between the Company and SAIC, during the period in which the Company is included in SAIC's consolidated group, the Company could be liable in the event that any federal tax liability is incurred, but not discharged, by any other member of SAIC's consolidated group. See "Risk Factors -- Control by SAIC," "-- Control of Tax Matters; Tax and ERISA Liability" and "-- Potential Conflicts of Interest." The Company believes that the foregoing transactions were in its best interests. It is the Company's current policy that all transactions by the Company with officers, directors, five percent stockholders and their affiliates will be entered into (or amended) only if such transactions are approved by a majority of the disinterested independent directors, are on terms no less favorable to the Company than could be obtained from unaffiliated parties and are reasonably expected to benefit the Company. RELATED PARTY TRANSACTIONS In fiscal 1996, the Company provided the following services under subcontracts to SAIC: (i) telecommunications design and support services to Kaiser Permanente for which the Company received $155,000; (ii) engineering and network services to Banco de Credito for which the Company received $864,000; (iii) engineering support to KUB/Malaysia for which the Company received $107,000; (iv) engineering services to the Center for Information Processing for which the Company received $103,000 and (v) other subcontracts for which the Company received $276,000. In addition, in fiscal 1996, SAIC provided database, applications and installation services to UUNET Technologies, Inc. under a subcontract to the Company for which SAIC received $133,000 and on other subcontracts to the Company for which SAIC received $95,000. The Company currently subleases from SAIC facilities in Herndon, Virginia and Charlotte, North Carolina. In fiscal 1996, the Company made lease payments of $737,000 to SAIC. For information concerning indemnification of directors and officers, see "Management -- Limitation of Liability and Indemnification Matters." 65 67 PRINCIPAL STOCKHOLDERS OWNERSHIP OF THE COMPANY'S COMMON STOCK As of the date of this Prospectus, no shares of Class A Common Stock are outstanding. Upon completion of this offering, the only shares of Class A Common Stock that will be outstanding are those that will be issued in the offering (including any shares issued if the Underwriters' over-allotment option is exercised) and those issued under the Company's stock incentive plans. See "Management -- Executive Compensation." The only stockholder of the Company is SAIC. The address of SAIC is 10260 Campus Point Drive, San Diego, California 92121. Upon completion of the offering, SAIC will own 100% of the Company's outstanding Class B Common Stock (12,500,000 shares), which will represent approximately % of the outstanding Common Stock of the Company (approximately % if the Underwriters' over-allotment option is exercised in full). Under Delaware law, SAIC is able, acting alone, to elect the entire Board of Directors of the Company and to control the vote on all matters submitted to a vote of the Company's stockholders, including extraordinary corporate transactions. Currently, five of the Company's eight directors are also directors and/or officers of SAIC. OWNERSHIP OF SAIC CLASS A COMMON STOCK The following table sets forth, at May 31, 1997, the ownership of SAIC Class A Common Stock held by the Company's directors, the Named Executive Officers, and all directors and executive officers as a group.
NUMBER OF SHARES OF PERCENTAGE OF SAIC CLASS A COMMON SHARES BENEFICIAL OWNER STOCK(1)(2) OUTSTANDING(3) - -------------------------------------------- -------------------- --------------- Gabriel A. Battista......................... 0 0.0% J. Robert Beyster........................... 779,586 1.6%(4) Raymond S. Corson........................... 6,280 * Michael A. Daniels.......................... 52,263 * Craig I. Fields............................. 2,000 * John E. Glancy.............................. 137,465 * Robert J. Korzeniewski...................... 29,725 * Emmit J. McHenry............................ 30,428 * William A. Roper, Jr........................ 43,191 * Stratton D. Sclavos......................... 0 0.0% Donald N. Telage............................ 38,079 * State Street Bank and Trust Company......... 24,183,729(5) 48.7%(6) One Enterprise Drive North Quincy, MA 02171 All directors and executive officers as a group (14 persons)................... 1,091,044 2.4%(7)
- --------------- * Less than 1% of the outstanding shares of SAIC's Class A Common Stock and less than 1% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (1) Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Except as indicated by footnote, and subject to community property laws where applicable, to the best of the Company's knowledge, the persons named in the table above have sole voting and investment power with respect to all shares of SAIC Class A Common Stock shown as beneficially-owned by them. Options to purchase shares of SAIC Class A Common Stock that are exercisable within 60 days of May 31, 1997 are deemed to be beneficially-owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (2) The beneficial ownership depicted in the table includes: (i) shares held for the account of the individual by the Trustee of SAIC's Employee Stock Ownership Plan, Profit Sharing Plan and Cash or Deferred Arrangement, as follows: J.R. Beyster (1,005 shares), Raymond S. Corson (2,852 shares), Michael A. Daniels (5,057 shares), John E. Glancy (26,676 shares), Robert J. Korzeniewski (5,580 shares), Emmit J. McHenry (97 shares), William A. Roper, Jr. (4,126 shares), Donald N. Telage (4,303 shares), and all executive officers and directors as a group (49,790 shares); (ii) shares subject to options which are exercisable within 60 days of May 31, 1997, as follows: Raymond S. Corson (762 shares), Michael A. Daniels (12,800 shares), Craig I. Fields (2,000 shares), John E. Glancy (13,800 shares), Robert J. Korzeniewski (12,120 shares), Emmit J. McHenry (4,000 shares), William A. Roper, Jr. (5,800 shares), Donald N. Telage (8,850 shares), and all executive officers and directors as a group (56,632 shares); (iii) shares held by spouses, minor children or other relatives sharing a household with the individuals, as follows: John E. Glancy (2,870 shares) and all executive officers and directors as a group (2,870 shares); and (iv) shares held by certain trusts established by the individual, as follows: J.R. Beyster (778,581 shares) and all executive officers and directors as a group (778,581 shares). (3) Applicable percentage of beneficial ownership is based on 49,614,025 shares of SAIC Class A Common Stock outstanding as of May 31, 1996. (4) Represents 1.5% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (5) As Trustee of certain retirement and stock benefit plans of SAIC and its subsidiaries. (6) Represents 47.2% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. (7) Represents 2.1% of the voting power of SAIC's Class A Common Stock and Class B Common Stock on a combined basis. 66 68 DESCRIPTION OF CAPITAL STOCK AUTHORIZED CAPITAL STOCK The authorized capital stock of the Company consists of 100 million shares of Class A Common Stock, par value $0.001 per share, 40 million shares of Class B Common Stock, par value $0.001 per share, and 10 million shares of Preferred Stock, par value $0.001 per share. None of the Class A Common Stock and Preferred Stock are outstanding as of the date hereof. Of the 100 million shares of Class A Common Stock authorized, are being offered hereby ( shares if the Underwriters' over-allotment option is exercised in full), shares will be reserved for issuance upon conversion of Class B Common Stock into Class A Common Stock and shares have been reserved for issuance pursuant to certain employee benefits plans. See "Management -- Executive Compensation." Of the 40 million shares of Class B Common Stock authorized, 12,500,000 shares, or 100% of the outstanding shares, are held by SAIC. The following summary description of the capital stock of the Company is qualified in its entirety by reference to the form of Certificate of Incorporation of the Company and the Bylaws of the Company, a copy of each of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part. COMMON STOCK Voting Rights. The holders of Class A Common Stock and Class B Common Stock generally have identical rights except that holders of Class A Common Stock are entitled to one vote per share while holders of Class B Common Stock are entitled to ten votes per share on all matters to be voted on by stockholders. The holders of Common Stock are not entitled to cumulative voting rights. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of Class A Common Stock and Class B Common Stock present in person or represented by proxy, voting together as a single class, subject to any voting rights granted to holders of any Preferred Stock. In the event of a voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of Common Stock would be entitled to share ratably in all assets remaining after payment of liabilities subject to prior distribution rights and payment of any distributions owing to holders of shares of Preferred Stock then outstanding, if any. Holders of the shares of Common Stock have no preemptive rights, and the shares of Common Stock are not subject to further calls or assessment by the Company. There are no redemption or sinking fund provisions applicable to the shares of Common Stock. Holders of Class A Common Stock and Class B Common Stock will share in an equal amount per share in any dividend declared by the Board of Directors, subject to any preferential rights of any outstanding Preferred Stock. Dividends consisting of shares of Class A Common Stock and Class B Common Stock may be paid only as follows: (i) shares of Class A Common Stock may be paid only to holders of Class A Common Stock and shares of Class B Common Stock may be paid only to holders of Class B Common Stock and (ii) shares shall be paid proportionally with respect to each outstanding share of Class A Common Stock and Class B Common Stock. Conversion Rights. While SAIC does not have a current intention of effecting a Tax-Free Spin-Off (as hereinafter defined), SAIC will continually evaluate its ownership of the Company and there can be no assurances whether SAIC will effect a Tax-Free Spin-Off in the future. Each outstanding share of Class B Common Stock is convertible at the holder's option into one share of Class A Common Stock at any time prior to a Tax-Free Spin-Off. Additionally, each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock if at any time prior to a Tax-Free Spin-Off the number of outstanding shares of Class B Common Stock owned by SAIC or any of its subsidiaries (or a Class B Transferee or any of its subsidiaries) represents less than 30% of the economic ownership represented by the aggregate number of shares of Common Stock then outstanding. If a Tax-Free Spin-Off occurs, shares of Class B Common Stock shall not be convertible into shares of Class A Common Stock at the option of the holder thereof. 67 69 Except as provided below, any shares of Class B Common Stock transferred to a person other than SAIC or any of its subsidiaries shall automatically convert to shares of Class A Common Stock upon such disposition. Prior to a Tax-Free Spin-Off, shares of Class B Common Stock representing more than a 50% economic interest in the Company transferred in a single transaction to one unrelated person (a "Class B Transferee") or among such Class B Transferee and its subsidiaries shall not automatically convert to shares of Class A Common Stock upon such disposition. Any shares of Class B Common Stock retained by SAIC following any such transfer of shares of Class B Common Stock to a Class B Transferee shall automatically convert into shares of Class A Common Stock upon such transfer. Shares of Class B Common Stock transferred to stockholders of SAIC or of a Class B Transferee in a transaction intended to be on a tax-free basis (a "Tax-Free Spin-Off") under the Internal Revenue Code of 1986 shall not convert to shares of Class A Common Stock upon the occurrence of such Tax-Free Spin-Off. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred as Class B Common Stock; provided, however, that shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the Tax-Free Spin-Off, unless prior to such Tax-Free Spin-Off, SAIC, or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company to the effect that (i) such conversion could adversely affect the ability of SAIC or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service that the distribution would be a Tax-Free Spin-Off or (ii) the Internal Revenue Service has adopted a general non-ruling policy on tax-free spinoffs and that such conversion could adversely affect the status of the transaction as a Tax-Free Spin-Off. If such written advice is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off, unless SAIC or the Class B Transferee, as the case may be, delivers to the Company written advice of counsel reasonably satisfactory to the Company prior to such anniversary that such vote could adversely affect the status of the distribution as a Tax-Free Spin-Off, including the ability to obtain a favorable ruling from the Internal Revenue Service. If such written advice is delivered, such vote shall not be held. Approval of such conversion will require the affirmative vote of the holders of a majority of the shares of both Class A Common Stock and Class B Common Stock present and voting, voting together as a single class, with each share entitled to one vote for such purpose. No assurance can be given that such conversion would be consummated. The foregoing requirements are intended to ensure that tax-free treatment of a Tax-Free Spin-Off is preserved should the Internal Revenue Service challenge such automatic conversion as violating the 80% vote requirement currently required by the Code for a Tax-Free Spin-Off. PREFERRED STOCK There are currently no shares of Preferred Stock outstanding. Under the Company's Amended and Restated Certificate of Incorporation, the Board of Directors has the authority, without further action by the stockholders, to issue from time to time up to 10,000,000 shares of the Preferred Stock in one or more series and to fix the number of shares, designations, preferences, powers, and relative, participating, optional or other special rights and the qualifications or restrictions thereof. The preferences, powers, rights and restrictions of different series of Preferred Stock may differ with respect to dividend rates, amounts payable on liquidation, voting rights, conversion rights, redemption provisions, sinking fund provisions, and purchase funds and other matters. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could decrease the amount of earnings and assets available for distribution to holders of Common Stock or affect adversely the rights and powers, including voting rights, of the holders of Common Stock, and may have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plan to issue any shares of Preferred Stock. 68 70 REGISTRATION RIGHTS Pursuant to an agreement between the Company and SAIC, which holds 12,500,000 shares of Class B Common Stock, SAIC is entitled to certain rights with respect to the registration under the Securities Act of the shares of Class A Common Stock issuable upon conversion of the Class B Common Stock owned by SAIC. If the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders, SAIC is entitled to notice of the registration and is entitled to include, at the Company's expense, such shares therein, provided, among other conditions, that the underwriters have the right to limit the number of such shares included in the registration. In addition, SAIC may require the Company on not more than two occasions, to file a registration statement under the Securities Act with respect to its shares of Class A Common Stock, and the Company is required to use its best efforts to effect the registration, subject to certain conditions and limitations. The first such registration will be at the Company's expense and the second such registration will be at SAIC's expense. Further, SAIC may require the Company at its expense to register their shares of Class A Common Stock on Form S-3 when such form becomes available to the Company, subject to certain conditions and limitations. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Certificate of Incorporation. The Company's Amended and Restated Certificate of Incorporation provides that the Company's Bylaws may be repealed or amended only by a two-thirds vote of the Board of Directors or a two-thirds stockholder vote. In addition, those provisions of the Amended and Restated Certificate of Incorporation may only be amended or repealed by the holders of at least two-thirds of the voting power of all the then-outstanding shares of stock entitled to vote generally for the election of directors voting together as a single class. The provisions described above, together with the ability of the Board of Directors to issue Preferred Stock as described under "Description of Capital Stock -- Preferred Stock," may have the effect of deterring a hostile takeover or delaying a change in control or management of the Company. See "Risk Factors -- Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate of Incorporation and Delaware Law." Delaware Takeover Statute. Section 203 of the Delaware General Corporation Law ("Section 203"), subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that such stockholder became an interested stockholder, unless: (i) prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (x) by persons who are directors and also officers and (y) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or (iii) on or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: (i) any merger or consolidation involving the corporation and the interested stockholder; (ii) any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; (iii) subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; (iv) any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially-owned by the interested stockholder; or (v) the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. In general, Section 203 defines an interested stockholder as any entity or 69 71 person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by such entity or person. As permitted by Section 203, the Company has elected not to be governed by the provisions of Section 203. CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS The Company's Amended and Restated Certificate of Incorporation provides that any person purchasing or acquiring an interest in shares of capital stock of the Company is deemed to have consented to the following provisions relating to intercompany agreements and to transactions with interested parties and corporate opportunities. The corporate charter of SAIC does not include comparable provisions relating to intercompany agreements, transactions with interested parties or corporate opportunities. Transactions with Interested Parties. The Company's Amended and Restated Certificate of Incorporation provides that no contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) between the Company and SAIC or any Related Entity (as such terms are defined below) or between the Company and any director or officer of the Company, SAIC or any Related Entity shall be void or voidable solely for the reason that SAIC, a Related Entity or any one or more of the officers or directors of the Company, SAIC or any Related Entity are parties thereto, or solely because any such directors or officers are present at, participate in or vote with respect to the authorization of such contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof). Further, the Company's Amended and Restated Certificate of Incorporation provides that neither SAIC nor any officer or director thereof or of any Related Entity shall be presumed liable to the Company or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Company or the derivation of any improper personal benefit by reason of the fact that SAIC or an officer or director thereof or of such Related Entity in good faith takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between SAIC or such Related Entity and the Company. No vote cast or other action taken by any person who is an officer, director or other representative of SAIC or such Related Entity, which vote is cast or action is taken by such person in his capacity as a director of the Company, shall constitute an action of or the exercise of a right by or a consent of SAIC, such subsidiary or Related Entity for the purpose of any such agreement or contract. For purposes of the foregoing, the "Company" and "SAIC" include all corporations and other entities in which the Company or SAIC, as the case may be, owns fifty percent or more of the outstanding voting stock, and "Related Entity" means one or more corporations or other entities in which one or more of the directors of the Company have a direct or indirect financial interest. Competition by SAIC with the Company; Corporate Opportunities. The Company's Amended and Restated Certificate of Incorporation provides that except as SAIC may otherwise agree in writing: (i) neither SAIC nor any subsidiary of SAIC (other than the Company) shall have a duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Company; and (ii) neither SAIC nor any subsidiary (other than the Company), officer or director thereof will be presumed liable to the Company or to its stockholders for breach of any fiduciary duty by reason of any such activities or of such person's participation therein. The Company's Amended and Restated Certificate of Incorporation also provides that if SAIC or any subsidiary of SAIC (other than the Company) acquires knowledge of a potential transaction or matter which may be a corporate opportunity both for SAIC or such subsidiary and for the Company, SAIC shall be entitled to offer such corporate opportunity to the Company or SAIC as SAIC deems appropriate under the circumstances in its sole discretion and shall not be presumed liable to the Company or its stockholders for breach of fiduciary duty as a stockholder of the Company or controlling person of a stockholder by reason of the fact that SAIC or such subsidiary pursues or acquires such opportunity for itself, directs such corporate opportunity to another person, or does not communicate information regarding such corporate opportunity to the Company. 70 72 Further, the Company's Amended and Restated Certificate of Incorporation provides that in the event that a director, officer or employee of the Company who is also a director, officer or employee of SAIC acquires knowledge of a potential transaction or matter that may be a corporate opportunity both for the Company and SAIC (whether such potential transaction or matter is proposed by a third party or is conceived by such director, officer or employee of the Company), such director, officer or employee shall be entitled to offer such corporate opportunity to the Company or SAIC as such director, officer or employee deems appropriate under the circumstances in his or her sole discretion, and no such director, officer or employee shall be presumed liable to the Company or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Company or the derivation of any improper personal benefit by reason of the fact that (i) such director, officer or employee offered such corporate opportunity to SAIC (rather than the Company) or did not communicate information regarding such corporate opportunity to the Company or (ii) SAIC pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Company. The enforceability of the provisions discussed above under Delaware corporate law has not been established and, due to the absence of relevant judicial authority, counsel to the Company is not able to deliver an opinion as to the enforceability of such provisions. These provisions of the Company's Amended and Restated Certificate of Incorporation eliminate certain rights that might have been available to stockholders under Delaware law had such provisions not been included in the Amended and Restated Certificate of Incorporation, although the enforceability of such provisions has not been established. At the time of the consummation of the offering, certain of the directors of the Company will also be directors and/or officers of SAIC. The foregoing provisions of the Company's Amended and Restated Certificate of Incorporation shall expire on the date that SAIC ceases to own beneficially Common Stock representing at least 20% of the number of outstanding shares of Common Stock and no person who is a director or officer of the Company is also a director or officer of SAIC or its subsidiaries. Actions Under Intercompany Agreements. The Company's Amended and Restated Certificate of Incorporation will also limit the liability of SAIC and its subsidiaries for certain breaches of their fiduciary duties in connection with action that may be taken or not taken in good faith under the intercompany agreements. See "Relationship with SAIC and Certain Transactions." Advance Notice Provision. The Company's Amended and Restated Bylaws provide for an advance notice procedure for the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors as well as for other stockholder proposals to be considered at annual meetings of stockholders. In general, notice of intent to nominate a director or raise matters at such meetings will have to be received by the Company not less than 120 days prior to any meeting of the stockholders called for the election of directors, and must contain certain information concerning the person to be nominated or the matters to be brought before the meeting and concerning the stockholder submitting the proposal. NASDAQ NATIONAL MARKET LISTING Prior to the date of this Prospectus, there has been no established public trading market for the Class A Common Stock. The Company has applied to have the Class A Common Stock approved for quotation on the Nasdaq National Market under the symbol NSOL. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Class A Common Stock is . 71 73 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering there has been no public market for the Common Stock of the Company, and no predictions can be made regarding the effect, if any, that market sales of shares or the availability of shares for sale will have on the market price prevailing from time to time. As described below, only a limited number of shares will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale. Nevertheless, sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price. Upon completion of this offering, the Company will have shares of Class A Common Stock outstanding (assuming no exercise of the Underwriters' over-allotment option). In addition, as of June 30, 1997, the Company had granted stock options to certain employees and directors for the purchase of an aggregate of 1,496,725 shares of Class A Common Stock. The shares of Class A Common Stock being sold hereby will be freely tradable (other than by an "affiliate" of the Company as such term is defined in Rule 144 of the Securities Act) without restriction or registration under the Securities Act. All remaining shares were issued and sold by the Company in a private transaction ("Restricted Shares") and are eligible for public sale if registered under the Securities Act or sold in accordance with Rule 701 thereunder. SAIC, which owns 12,500,000 shares of Class B Common Stock and certain Restricted Persons have agreed they will not sell any shares of Common Stock owned by them without the prior written consent of the Representatives of the Underwriters for a period of 180 days from the effective date of the Registration Statement of which this Prospectus is a part (the "Lockup Period"). Following the expiration of the Lockup Period, SAIC and such Restricted Persons may sell such shares only pursuant to the requirements of Rule 144 or pursuant to an effective registration statement under the Securities Act. Furthermore, the shares held by SAIC and such Restricted Persons are "restricted securities" within the meaning of Rule 144. Following the expiration of the Lockup Period, approximately 12,500,000 shares of Class B Common Stock held by SAIC and shares of Class A Common Stock held by such Restricted Persons will be eligible for sale in the public market subject to compliance with Rule 144. See "Underwriting." Subject to certain limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from the Company by its employees, directors, officers, consultants or advisers prior to the closing of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of such persons. In addition, the Commission has indicated that Rule 701 will apply to stock options granted by the Company before this offering, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be Restricted Shares and, beginning 90 days after the date of this Prospectus (unless subject to the contractual restrictions described above), may be sold by persons other than affiliates subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirements. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an affiliate of the Company, or a holder of Restricted Shares who owns beneficially shares that were not acquired from the Company or an affiliate of the Company within the previous year, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately shares immediately after this offering, assuming no exercise of the Underwriters' over-allotment option) or the average weekly trading volume of Class A Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. However, a person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale 72 74 and who owns beneficially Restricted Shares is entitled to sell such shares under Rule 144(k) without regard to the limitations described above, provided that at least two years have elapsed since the later of the date the shares were acquired from the Company or from an affiliate of the Company. The foregoing is a summary of Rule 144 and is not intended to be a complete description of it. The Company intends to file a registration statement on Form S-8 under the Securities Act covering approximately 2,556,250 shares of Class A Common Stock reserved for issuance under the 1996 Stock Incentive Plan. Such registration statement is expected to be filed soon after the date of this Prospectus and will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, unless such shares are subject to vesting restrictions with the Company or the contractual restrictions described above. In addition, after this offering and the Lockup Period, SAIC will be entitled to certain rights to cause the Company to register the sale of its shares of Common Stock under the Securities Act. Registration of such shares under the Securities Act would result in such shares becoming freely tradable without restriction under the Securities Act (except for shares purchased by affiliates of the Company) immediately upon the effectiveness of such registration. See "Description of Capital Stock -- Registration Rights." 73 75 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below, through their Representatives, Hambrecht & Quist LLC, J.P. Morgan Securities Inc. and PaineWebber Incorporated have severally agreed to purchase from the Company the following respective numbers of shares of Class A Common Stock:
NUMBER OF NAME SHARES --------------------------------------------------------------- --------- Hambrecht & Quist LLC.......................................... J.P. Morgan Securities Inc. ................................... PaineWebber Incorporated....................................... --------- Total.......................................................... ==========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company and its counsel and independent auditors. The nature of the Underwriters' obligations is such that they are committed to purchase all shares of Class A Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Class A Common Stock directly to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After the initial public offering of the shares, the offering price and other selling terms may by changed by the Representatives of the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 calendar days after the date of this Prospectus, to purchase up to an aggregate of additional shares of Class A Common Stock at the initial public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Class A Common Stock to be purchased by it shown in the above table bears to the total number of shares of Class A Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Class A Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Underwriters may be required to make in respect thereof. The Company, SAIC and certain Restricted Persons have agreed, with certain exceptions, that they will not, without the prior written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of any Common Stock, options or warrants to acquire shares of Common Stock or securities exchangeable for or convertible into shares of Common Stock during the 180-day period following the date of this Prospectus. The Representatives have informed the Company that the Underwriters do not intend to confirm sales of Class A Common Stock offered hereby to any accounts over which they exercise discretionary authority. 74 76 Prior to the offering, there has been no public market for the Class A Common Stock. The initial public offering price for the Class A Common Stock will be determined by negotiation among the Company and the Representatives. Among the factors considered in determining the initial public offering price are prevailing market conditions, revenues and earnings of the Company, market valuations of other companies engaged in activities similar to those of the Company, estimates of the business potential and prospects of the Company, the present state of the Company's business operations, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. Certain persons participating in this offering may overallot or effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market, including by entering stabilizing bids, effecting syndicate covering transactions or imposing penalty bids. A stabilizing bid means the placing of any bid or effecting of any purchase, for the purpose of pegging, fixing or maintaining the price of the Common Stock. A syndicate covering transaction means the placing of any bid on behalf of the underwriting syndicate or the effecting of any purchase to reduce a short position created in connection with the offering. A penalty bid means an arrangement that permits the Underwriters to reclaim a selling concession from a syndicate member in connection with the offering when shares of Common Stock sold by the syndicate member are purchased in syndicate covering transactions. Such transactions may be effected on the Nasdaq National Market, in the over-the-counter market, or otherwise. Such stabilizing, if commenced, may be discontinued at any time. The Underwriters have reserved up to 5% of the shares of Class A Common Stock offered hereby for sale at the initial public offering price to certain officers, directors and other persons designated by the Company. The number of shares available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares not so purchased on the effectiveness of the offering will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. LEGAL MATTERS Certain legal matters with respect to the validity of the Class A Common Stock offered hereby are being passed upon for the Company by Pillsbury Madison & Sutro LLP, Menlo Park, California and Washington D.C. Certain legal matters in connection with the offering will be passed upon for the Underwriters by Simpson Thacher & Bartlett (a partnership which includes professional corporations), New York, New York. EXPERTS The financial statements as of December 31, 1995 and 1996 and for the year ended December 31, 1994, the periods from January 1, 1995 to March 10, 1995 and from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 included in this Prospectus have been so included in reliance on the reports of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to such Registration Statement and the 75 77 exhibits and schedules thereto. Statements contained in this Prospectus regarding the contents of any contract or other document are not necessarily complete; with respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. A copy of the Registration Statement, including the exhibits and schedules, thereto, may be inspected without charge at the principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven World Trade Center, New York, New York 10048 and 500 West Madison Street, Chicago, Illinois 60661. Copies of such material may also be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the Commission. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web site is http://www.sec.gov. The Company is not currently subject to the informational requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the offering of the Company's Common Stock, the Company will become subject to the informational requirements of the Exchange Act. The Company intends to furnish its stockholders with annual reports containing financial statements audited by independent certified public accountants and quarterly reports containing unaudited financial information for the first three quarters of each fiscal year. 76 78 INDEX TO FINANCIAL STATEMENTS
PAGE -------- Report of Independent Accountants................................................. F-2, F-3 Statements of Financial Position as of December 31, 1995 and 1996 and March 31, 1997 (Unaudited)....................... F-4 Statements of Operations for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Three Months Ended March 31, 1996 and 1997 (Unaudited)....................................................... F-5 Statements of Changes in Stockholder's Equity for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Three Months Ended March 31, 1997 (Unaudited)......................................... F-6 Statements of Cash Flows for the Year Ended December 31, 1994, for the Periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995, for the Year Ended December 31, 1996, and for the Three Months Ended March 31, 1996 and 1997 (Unaudited)....................................................... F-7 Notes to Financial Statements..................................................... F-8
F-1 79 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Network Solutions, Inc. In our opinion, the accompanying statements of financial position and the related statements of operations, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the financial position of Network Solutions, Inc. (a wholly-owned subsidiary of Science Applications International Corporation) at December 31, 1996 and 1995, and the results of its operations and cash flows for the year ended December 31, 1996 and for the period from March 11, 1995 to December 31, 1995 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, on March 10, 1995 Science Applications International Corporation acquired the outstanding stock of the Company. The financial statements for the periods subsequent to March 10, 1995 have been prepared on the basis of accounting arising from this acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. PRICE WATERHOUSE LLP Falls Church, VA March 17, 1997, except as to Note 13 which is as of June 26, 1997 F-2 80 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholder of Network Solutions, Inc. In our opinion, the accompanying statements of operations, of changes in stockholder's equity and of cash flows present fairly, in all material respects, the results of operations and cash flows for Network Solutions, Inc. ("Predecessor") for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the financial statements, on March 10, 1995 Science Applications International Corporation acquired the outstanding stock of the Company. The financial statements for the periods subsequent to March 10, 1995 have been prepared on the basis of accounting arising from this acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. PRICE WATERHOUSE LLP Falls Church, VA March 17, 1997, except as to Note 13 which is as of June 26, 1997 F-3 81 NETWORK SOLUTIONS, INC. STATEMENTS OF FINANCIAL POSITION
DECEMBER 31, -------------------------- MARCH 31, 1995 1996 1997 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................... $ 5,000 $15,540,000 $12,483,000 Accounts receivable, net............................ 4,040,000 12,587,000 9,608,000 Prepaids and other assets........................... 11,000 936,000 1,316,000 Restricted assets................................... 1,408,000 17,453,000 23,813,000 Deferred tax asset.................................. 1,310,000 10,087,000 9,720,000 ----------- ----------- ----------- Total current assets.................................. 6,774,000 56,603,000 56,940,000 Furniture and equipment, net.......................... 1,067,000 2,266,000 3,380,000 Deferred tax asset.................................... 911,000 4,968,000 4,431,000 Goodwill, net......................................... 2,996,000 2,281,000 2,099,000 ----------- ----------- ----------- Total Assets.......................................... $11,748,000 $66,118,000 $66,850,000 =========== =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued liabilities............ $ 1,355,000 $ 2,581,000 $ 2,898,000 Deferred revenue, net............................... 1,993,000 19,912,000 25,345,000 Net liabilities of discontinued operations.......... 208,000 -- -- Due to parent....................................... 2,369,000 15,295,000 148,000 Internet fund liability............................. 1,408,000 17,453,000 23,813,000 Current portion of capital lease obligations........ -- -- 99,000 ----------- ----------- ----------- Total current liabilities............................. 7,333,000 55,241,000 52,303,000 Long-term deferred revenue, net....................... 1,353,000 9,440,000 11,555,000 Capital lease obligations............................. -- -- 1,039,000 ----------- ----------- ----------- Total liabilities..................................... 8,686,000 64,681,000 64,897,000 Stockholder's equity: Preferred stock, $.001 par value, authorized 10,000,000 shares; none issued and outstanding... -- -- -- Class A Common stock, $.001 par value; authorized 100,000,000 shares; none issued and outstanding...................................... -- -- -- Class B Common stock, $.001 par value, authorized 40,000,000 shares; 12,500,000 issued and outstanding...................................... 12,000 12,000 12,000 Additional paid-in capital.......................... 4,468,000 4,468,000 4,468,000 Accumulated deficit................................. (1,418,000) (3,043,000) (2,527,000) ----------- ----------- ----------- Total stockholder's equity............................ 3,062,000 1,437,000 1,953,000 Commitments and contingencies......................... ----------- ----------- ----------- Total Liabilities and Stockholder's Equity............ $11,748,000 $66,118,000 $66,850,000 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4 82 NETWORK SOLUTIONS, INC. STATEMENTS OF OPERATIONS
PREDECESSOR COMPANY COMPANY -------------------------------- ------------------------------- ------------------------- YEAR ENDED JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED THREE MONTHS ENDED DECEMBER 31, TO MARCH 10, TO DECEMBER 31, DECEMBER 31, MARCH 31, 1994 1995 1995 1996 1996 1997 ------------ ---------------- --------------- ------------ ----------- ---------- (UNAUDITED) Net revenue................. $ 5,029,000 $ 1,177,000 $ 5,309,000 $18,862,000 $ 2,333,000 $8,655,000 Cost of revenue............. 3,073,000 884,000 4,820,000 14,666,000 2,950,000 5,294,000 ----------- ------------ ----------- ----------- ----------- ---------- Gross profit (loss)......... 1,956,000 293,000 489,000 4,196,000 (617,000) 3,361,000 Research and development expenses.................. -- -- -- 680,000 -- 311,000 Selling, general and administrative expenses... 1,544,000 280,000 2,114,000 6,280,000 921,000 2,301,000 Interest expense (income) (includes related party interest expense of $52,000 for the period March 11, 1995 to December 31, 1995 and interest income of $496,000 for 1996)..................... 109,000 9,000 52,000 (496,000) -- (149,000) ----------- ------------ ----------- ----------- ----------- ---------- Income (loss) from continuing operations before income taxes....... 303,000 4,000 (1,677,000) (2,268,000) (1,538,000) 898,000 Provision (benefit) for income taxes.............. 114,000 48,000 (287,000) (643,000) (436,000) 382,000 ----------- ------------ ----------- ----------- ----------- ---------- Income (loss) from continuing operations..... 189,000 (44,000) (1,390,000) (1,625,000) (1,102,000) 516,000 Loss from discontinued operations, net of income taxes..................... (1,169,000) (1,375,000) (28,000) -- -- -- ----------- ------------ ----------- ----------- ----------- ---------- Net income (loss)........... $ (980,000) $ (1,419,000) $(1,418,000) $(1,625,000) $(1,102,000) $ 516,000 =========== ============ =========== =========== =========== ========== Unaudited pro forma net income (loss) per share... $ $ $ =========== =========== ========== Unaudited pro forma shares used in computing income (loss) per share.......... =========== =========== ==========
The accompanying notes are an integral part of these financial statements. F-5 83 NETWORK SOLUTIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
COMMON STOCK TREASURY STOCK ADDITIONAL RETAINED TOTAL -------------------- ------------------ PAID-IN EARNINGS STOCKHOLDER'S SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ---------- ------- ------- --------- ---------- ----------- ----------- PREDECESSOR Balance, December 31, 1993................. 1,159,000 $12,000 115,000 $(673,000) $1,275,000 $ 607,000 $ 1,221,000 Purchase of treasury stock............... -- -- 7,000 (25,000) -- -- (25,000) Issuance of treasury stock............... -- -- (12,000) 70,000 (34,000) -- 36,000 Net loss for the year ended December 31, 1994................................... -- -- -- -- -- (980,000) (980,000) ---------- ------- ------- --------- ---------- ----------- ----------- Balance, December 31, 1994................. 1,159,000 12,000 110,000 (628,000) 1,241,000 (373,000) 252,000 Purchase of treasury stock............... -- -- 7,000 (30,000) -- -- (30,000) Net loss for the period from January 1 to March 10, 1995......................... -- -- -- -- -- (1,419,000) (1,419,000) ---------- ------- ------- --------- ---------- ----------- ----------- Balance, March 10, 1995.................... 1,159,000 $12,000 117,000 $(658,000) $1,241,000 $(1,792,000) $(1,197,000) ========== ======= ======= ========= ========== =========== =========== COMPANY Purchase of outstanding common shares by SAIC on March 10, 1995................... 12,500,000 $12,000 $4,468,000 $ -- $ 4,480,000 Net loss for the period from March 11 to December 31, 1995........................ -- -- -- (1,418,000) (1,418,000) ---------- ------- ---------- ----------- ----------- Balance, December 31, 1995................. 12,500,000 12,000 4,468,000 (1,418,000) 3,062,000 Net loss for the year ended December 31, 1996................................... -- -- -- (1,625,000) (1,625,000) ---------- ------- ---------- ----------- ----------- Balance, December 31, 1996................. 12,500,000 12,000 4,468,000 (3,043,000) 1,437,000 Net income for the three months ended March 31, 1997................................. -- -- -- 516,000 516,000 ---------- ------- ---------- ----------- ----------- Balance, March 31, 1997 (Unaudited)........ 12,500,000 $12,000 $4,468,000 $(2,527,000) $ 1,953,000 ========== ======= ========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-6 84 NETWORK SOLUTIONS, INC. STATEMENTS OF CASH FLOWS
PREDECESSOR COMPANY COMPANY -------------------------------- ------------------------------- ---------------------------- YEAR ENDED JANUARY 1, 1995 MARCH 11, 1995 YEAR ENDED THREE MONTHS ENDED DECEMBER 31, TO MARCH 10, TO DECEMBER 31, DECEMBER 31, MARCH 31, 1994 1995 1995 1996 1996 1997 ------------ ---------------- --------------- ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............ $ (980,000) $ (1,419,000) $(1,418,000) $(1,625,000) $ (1,102,000) $ 516,000 Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Net loss from discontinued operations............... 1,169,000 1,376,000 28,000 -- -- -- Depreciation and amortization............. 338,000 68,000 765,000 1,417,000 235,000 365,000 Provision for uncollectible accounts receivable...... -- -- 124,000 3,597,000 387,000 2,163,000 Deferred income taxes...... -- -- (2,221,000) (12,834,000) (2,135,000) 904,000 Change in operating assets and liabilities: Decrease (increase) in accounts receivable.... 322,000 (161,000) (3,385,000) (12,144,000) (3,123,000) 816,000 Decrease (increase) in prepaid and other assets................. 22,000 (36,000) 45,000 (925,000) 6,000 (380,000) (Increase) decrease in deposits............... -- (49,000) 1,053,000 -- -- -- Increase (decrease) in accounts payable and accrued liabilities.... 219,000 233,000 282,000 1,226,000 (313,000) 317,000 (Decrease) increase in other liabilities...... (7,000) 8,000 (89,000) -- -- -- Increase (decrease) in deferred revenue....... 64,000 (30,000) 3,239,000 26,006,000 4,852,000 7,548,000 ----------- ------------ ----------- ----------- ------------ ------------ Net cash provided by (used in) operating activities........... 1,147,000 (10,000) (1,577,000) 4,718,000 (1,193,000) 12,249,000 ----------- ------------ ----------- ----------- ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture and equipment................ (266,000) (134,000) (518,000) (1,901,000) (897,000) (159,000) Net investment in net assets of discontinued operations............... (759,000) 331,000 563,000 (208,000) (208,000) -- ----------- ------------ ----------- ----------- ------------ ------------ Net cash (used in) provided by investing activities........... (1,025,000) 197,000 45,000 (2,109,000) (1,105,000) (159,000) ----------- ------------ ----------- ----------- ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from bank borrowings............... 173,000 -- -- -- -- -- Repayment of bank borrowings............... (170,000) (293,000) (834,000) -- -- -- Net transactions with SAIC..................... -- -- 2,371,000 12,926,000 2,306,000 (15,147,000) Issuance of treasury stock.................... 36,000 -- -- -- -- -- Purchase of treasury stock.................... (25,000) (30,000) -- -- -- -- ----------- ------------ ----------- ----------- ------------ ------------ Net cash provided by (used in) financing activities........... 14,000 (323,000) 1,537,000 12,926,000 2,306,000 (15,147,000) ----------- ------------ ----------- ----------- ------------ ------------ Net increase (decrease) in cash and cash equivalents.......... 136,000 (136,000) 5,000 15,535,000 8,000 (3,057,000) Cash and cash equivalents, beginning of period........ -- 136,000 -- 5,000 5,000 15,540,000 ----------- ------------ ----------- ----------- ------------ ------------ Cash and cash equivalents, end of period.............. $ 136,000 $ -- $ 5,000 $15,540,000 $ 13,000 $ 12,483,000 =========== ============ =========== =========== ============ ============
The accompanying notes are an integral part of these financial statements. F-7 85 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION Network Solutions, Inc. (the "Company") was incorporated in the District of Columbia in 1979 and was reincorporated in Delaware in 1996. The Company currently acts as the exclusive registrar of Internet domain names within the .com, .org, .net, .edu and .gov top level domains ("TLDs") pursuant to a Cooperative Agreement with the National Science Foundation ("NSF") (Note 2). The Company also provides Intranet consulting and network design and implementation services to large companies that desire to establish or enhance their Internet presence or to "re-engineer" legacy network infrastructures to accommodate the integration of both Internet connectivity and Intranet network technology into their information technology base. The Company was acquired by Science Applications International Corporation ("SAIC") on March 10, 1995 (the "acquisition"). The Company currently is a wholly-owned subsidiary of SAIC. Prior to the acquisition of the Company by SAIC, the Company's business included government contracts awarded to the Company based in part upon its then minority ownership status. These contracts were transferred into a separately-owned entity prior to the SAIC acquisition. Accordingly, the business acquired by SAIC consisted of remaining government contracts awarded to the Company and commercial contracts. Subsequent to the SAIC acquisition, the commercial and remaining government-related activities of the Company have continued to be accounted for as separate divisions. In November 1995, SAIC adopted a plan to transfer the Company's remaining government-based business to SAIC in order to focus on the growth of the Company's commercial business, which business includes Internet registration services and Intranet services. Such transfer was substantially completed as of February 1996. The activities of both the minority-based government business, which was transferred into a separate entity prior to the acquisition of the Company by SAIC, and the remaining government-based business, which was transferred to SAIC, are reflected as discontinued operations in the financial statements of the Company for all periods presented (Note 11). The commercial operations, as defined, are reflected as continuing operations in the financial statements of the Company for all periods presented. Under the terms of the acquisition agreement, Network Solutions, Inc. was acquired by SAIC on March 10, 1995 in a stock-for-stock transaction accounted for as a purchase. The fair market value of the SAIC stock exchanged for the outstanding stock of NSI was approximately $3.9 million. The acquisition agreement provided for certain purchase adjustments and related additional stock issuance payments of approximately $600,000. After reflecting certain purchase accounting adjustments, the net assets included on the opening balance sheet were as follows: Current assets.......................................................... $ 929,000 Furniture and equipment................................................. 734,000 Goodwill................................................................ 3,576,000 Other non-current assets................................................ 1,047,000 ---------- 6,286,000 Current liabilities..................................................... 1,625,000 Net liabilities of discontinued operations.............................. 181,000 ---------- Net assets acquired at March 11, 1995.............................. $4,480,000 ==========
The excess of the purchase price over the estimated fair value of net assets acquired has been reflected as goodwill and is being amortized over five years. F-8 86 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 1 -- ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED) The financial statements for periods subsequent to March 10, 1995 are presented on the new basis of accounting arising from the acquisition. The financial statements for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 are presented on the Company's previous basis of accounting. Subsequent to the acquisition, the results of continuing and discontinued operations include allocations by SAIC of: (i) costs for administrative functions and services performed on behalf of the continuing and discontinued operations of the Company by centralized staff groups within SAIC, (ii) SAIC's general corporate expenses, (iii) pension and other retirement benefit costs, and (iv) cost of capital (Notes 5, 9 and 10). Only costs directly attributable to the Company's government-based business that will not be incurred by the Company subsequent to the transfer of this business to SAIC have been included in discontinued operations. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NSF COOPERATIVE AGREEMENT In January 1993, the Company entered into the Cooperative Agreement with the NSF under which the Company provides Internet registration services for five TLDs. The Cooperative Agreement is subject to review by the NSF on an annual basis in March of each year but may be terminated by the NSF at any time at its discretion or by mutual agreement. The agreement expires in March 1998. The Company intends to continue to function as a registrar of Internet domain names. The original terms of the Cooperative Agreement provided for a cost reimbursement plus fixed-fee contract (with a fee of 8%). Effective September 14, 1995, the NSF and the Company amended the Cooperative Agreement to authorize the Company to begin charging a subscription fee of $50 per year to the end-users for each second level domain name in the .com, .org, .net, .edu and .gov TLDs. The Company's registrants pay a subscription fee of $100 for two years for initial registrations and $50 per year payable in advance for renewals of initial registrations. Under the terms of the amendment to the Cooperative Agreement, 30% of such registration or renewal fees collected by the Company are required to be set aside to be reinvested for the enhancement of the intellectual infrastructure of the Internet and, as such, are not recognized as net revenue by the Company. The Company has reflected the cash funds that have been set aside, together with an allocation of net accounts receivable expected to be set aside upon collection of the cash (Note 3), as restricted assets and has also recorded a corresponding liability. The Company maintains the cash received relating to the set aside funds in a separate interest-bearing account. Restricted cash at December 31, 1996 and 1995 was approximately $13,049,000 and $122,000, respectively. These funds, plus any interest earned, will be disbursed in a manner approved by the NSF. As of December 31, 1996, none of these funds have been disbursed. Future receipts and disbursements of these funds will not have an effect on the Company's business, net financial position, or results of operations. For purposes of the Statement of Cash Flows, amounts relating to Restricted Assets and the Internet Fund Liability have been excluded in their entirety. REVENUE RECOGNITION Prior to September 14, 1995, net revenue was recognized under the Cooperative Agreement on the basis of direct costs plus allowable indirect costs and the earned portion of the fee. Since September 14, 1995, fees for Internet registration services provided by the Company have been recognized on a straight-line basis over the life of the registration term. The Company records revenue net of an estimated provision for uncollectible accounts receivable (Note 3). F-9 87 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Substantially all of the Company's Intranet services revenue is derived from professional services which are generally provided to clients on a "time and expense" basis. Professional services revenue is recognized as services are performed. The Company performs a limited number of fixed-price projects under which revenue is recognized using the percentage-of-completion method, based upon costs incurred in comparison to total anticipated costs. The Company also derives revenue from remote monitoring and hosting services; however, such revenue has not been significant to date. Remote monitoring and hosting revenue is recognized ratably over the term of the contract. Certain aspects of a number of the Company's contracts are subject to audits at the customer's discretion. Management believes that the results of any such audits will not have a material effect on NSI's financial position or results of operations. DEFERRED REVENUE Deferred revenue primarily represents the unearned portion of revenue related to the unexpired term of Internet registration fees, net of an estimate for uncollectible accounts receivable (Note 3). CASH AND CASH EQUIVALENTS The Company's policy is to include short-term investments with original maturities of ninety days or less within cash and cash equivalents. FINANCIAL INSTRUMENTS The recorded value of the Company's financial instruments, which include accounts receivable and accounts payable, approximates market value. Net revenue from two customers approximated 63% and 22% in 1994, 45% and 21% for the period from January 1, 1995 to March 10, 1995, 40% and 21% for the period from March 11, 1995 to December 31, 1995, and 20% and 0% for the year ended December 31, 1996. One of these customers was the National Science Foundation, whose impact on the above percentage of revenues was reflective of activity prior to the September 14, 1995 amendment of the Cooperative Agreement. Concentration of credit risk with respect to registration receivables is limited due to the wide variety and number of customers, as well as their dispersion across geographic areas. The Company has no derivative financial instruments. FURNITURE AND EQUIPMENT Furniture and equipment are stated at cost. Depreciation on furniture, office and computer equipment is calculated principally using a declining-balance method over the useful lives of three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated lives of the assets, generally six years. GOODWILL Goodwill represents the excess of the purchase cost over the fair value of net assets acquired in the acquisition and is amortized over five years using the straight-line method. The Company periodically reviews goodwill to assess recoverability, and impairments are recognized in the results of operations, as appropriate. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill from expected future operating cash flows on an undiscounted basis. Amortization expense for the period from March 11, 1995 to December 31, 1995 of $580,000 and $715,000 for the year ended December 31, 1996 was included in general and administrative expenses. F-10 88 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) SOFTWARE DEVELOPMENT COSTS Research and development costs are expensed as incurred. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed", the Company has not capitalized software development costs incurred as of December 31, 1996. Research and development costs incurred for all periods presented prior to December 31, 1995 were reimbursed to the Company by direct charges to contracts and are included in cost of revenue for those periods. INCOME TAXES Deferred taxes are accounted for under SFAS No. 109 "Accounting for Income Taxes", which is an asset and liability method of accounting for income taxes. The liability method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between carrying amounts and tax bases of assets and liabilities. A valuation allowance is recorded if it is "more likely than not" that some portion of or all of a deferred tax asset will not be realized. Additionally, under the liability method, changes in tax rates and laws will be reflected in income in the period such changes are enacted. For federal income tax purposes, the Company's results will be included in SAIC's consolidated tax return. For periods subsequent to the acquisition, income taxes are determined as if the Company was a separate taxpayer. Income taxes currently payable have been charged by the Company to the due to parent account in the period that the liability arose. Income taxes currently receivable have been charged to the due to parent account in the period that a refund could have been recognized by the Company had the Company been a separate taxpayer. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions, based upon all known facts and circumstances that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. Estimates requiring relatively greater levels of judgment include the allowance for uncollectible accounts receivable, the assessment of the need for a tax valuation allowance and the amortization period for goodwill. EARNINGS PER SHARE Net income (loss) per share of common stock is calculated by dividing the net income (loss) by the number of shares issued to SAIC in connection with the reincorporation of the Company in Delaware, and common stock equivalent shares from common stock options granted within one year of the initial public offering. Common stock equivalent shares are calculated using the treasury stock method. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalent shares issued by the Company at prices below the public offering price during the twelve month period prior to the proposed offering date have been included in the calculation as if they were outstanding since March 10, 1995 regardless of whether they are dilutive. Earnings per share amounts will be presented once the initial offering price is known. F-11 89 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) STOCK BASED COMPENSATION The Company accounts for its stock option and employee stock purchase plans in accordance with the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". No compensation cost has been recognized by the Company for its employee stock plans. SFAS No. 123, "Accounting for Stock-Based Compensation", provides an alternative accounting method to APB No. 25 and requires additional pro forma disclosures (Note 10). The Company expects to continue to account for its employee stock plans in accordance with the provisions of APB No. 25. INTERIM FINANCIAL INFORMATION (UNAUDITED) Interim financial information for the three months ended March 31, 1996 and 1997 included herein is unaudited. However, in the opinion of the Company, the interim financial information includes all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The results of operations for the three months ended March 31, 1997 are not necessarily indicative of the results to be expected for the full year ending December 31, 1997. NOTE 3 -- RECEIVABLES Receivables consist of the following amounts as of December 31:
1995 1996 ---------- ----------- Billed...................................................... $6,060,000 $27,430,000 Unbilled.................................................... 1,384,000 5,000,000 ---------- ----------- Total accounts receivable before allowances............ 7,444,000 32,430,000 Less -- Allowance for doubtful accounts..................... (2,118,000) (15,439,000) -- Accounts receivable allocable to 30% NSF set-aside (Note 2)............................................ (1,286,000) (4,404,000) ---------- ----------- Accounts receivable, net.................................... $4,040,000 $12,587,000 ========== ===========
Unbilled receivables consist of costs which have been incurred on time and expense contracts and Internet domain name registration fees which have not yet been billed. Under the Cooperative Agreement, thirty percent of collected registration fees is required to be set aside for disbursement at the direction of the NSF. In accounting for registration subscriptions, the Company records accounts receivable and deferred revenue. An allowance for estimated uncollectible accounts is recorded against both accounts receivable and deferred revenue. Registration fee revenue is recognized on a straight-line basis over the subscription period. The allowance offsetting deferred revenue is ratably reduced as the underlying revenue is recognized. At such time, a corresponding provision for uncollectible accounts receivable is recorded. The provision for uncollectible accounts receivable was $124,000 and $3,597,000 for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996, respectively. There was no provision necessary for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995. The Company's allowance for uncollectible accounts receivable is associated solely with its registration business. The Company believes it has been necessary to establish its provision for uncollectible accounts receivable principally due to the large number of individuals and corporations that have registered multiple domain names with the apparent intention F-12 90 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 3 -- RECEIVABLES (CONTINUED) of reselling such names at a profit. The Company's experience has been that, in contrast to other subscribers, such resellers have a higher tendency of default on their subscription fees. NOTE 4 -- FURNITURE AND EQUIPMENT Furniture and equipment consist of the following amounts as of December 31:
1995 1996 ----------- ----------- Furniture and office equipment............................. $ 782,000 $ 879,000 Computer equipment......................................... 2,248,000 4,033,000 Leasehold improvements..................................... 214,000 234,000 ---------- ---------- Furniture and equipment, at cost...................... 3,244,000 5,146,000 Less accumulated depreciation and amortization............. (2,177,000) (2,880,000) ---------- ---------- Furniture and equipment, net.......................... $ 1,067,000 $ 2,266,000 ========== ==========
NOTE 5 -- DEBT Interest expense reflected in continuing operations for the year ended December 31, 1994 and the period January 1, 1995 to March 10, 1995 was $109,000 and $9,000, respectively. Interest expense reflected in discontinued operations for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995 was $495,000 and $51,000, respectively. Interest charges prior to the acquisition have been reflected in continuing and discontinued operations based on the debt balances associated with each of the continuing and discontinued operations for each of the periods. In addition, interest expense of $52,000 and $164,000 for the period from March 11, 1995 to December 31, 1995 was allocated by SAIC to the Company's continuing operations and discontinued operations, respectively, based upon SAIC's cost of capital calculation. For the year ended December 31, 1996, interest revenue of $496,000 was allocated by SAIC based upon the cost of capital calculation. The SAIC cost of capital formula provides for charges and credits to the Company based upon management of certain assets, including accounts receivable and fixed assets. Such amounts are not necessarily indicative of the cost that would have been incurred if the Company had been operated as a separate entity. Effective January 1, 1997, the Company will no longer be subject to SAIC's cost of capital calculation in connection with the Company fulfilling its own treasury function. Interest paid for the year ended December 31, 1994, for the periods from January 1, 1995 to March 10, 1995 and March 11, F-13 91 NETWORK SOLUTIONS, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 5 -- DEBT (CONTINUED) 1995 to December 31, 1995 and for the year ended December 31, 1996 was $74,000, $0, $103,000 and $0, respectively. NOTE 6 -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consist of the following amounts as of December 31:
1995 1996 ---------- ---------- Accounts payable............................................. $ 80,000 $1,054,000 Accrued expenses............................................. 565,000 1,412,000 Accrued payroll.............................................. 710,000 115,000 ---------- ---------- Total accounts payable and accrued expenses.................. $1,355,000 $2,581,000 ========== ==========
NOTE 7 -- PROVISION FOR INCOME TAXES The results of the Company subsequent to its acquisition by SAIC were included in SAIC's consolidated tax returns. The tax expense allocation methodology is set forth in Note 2. The provision for (benefit) from income taxes charged to continuing operations consists of the following:
FOR THE PERIOD 1995 YEAR ENDED --------------------------- YEAR ENDED DECEMBER 31, JANUARY 1 TO MARCH 11 TO DECEMBER 31, 1994 MARCH 10 DECEMBER 31 1996 ------------ ------------ ----------- ------------ Current: Federal...................... $ 95,000 $ 40,000 $ 1,521,000 $ 10,171,000 State........................ 19,000 8,000 311,000 2,020,000 -------- -------- ----------- ------------ Total current provision............. 114,000 48,000 1,832,000 12,191,000 -------- -------- ----------- ------------ Deferred: Federal...................... (1,759,000) (10,716,000) State........................ (360,000) (2,118,000) ----------- ------------ Total deferred benefit............... (2,119,000) (12,834,000) ----------- ------------ Provision for (benefit) from income taxes.................... $114,000 $ 48,000 $ (287,000) $ (643,000) ======== ======== =========== ============
Deferred tax assets are comprised of the following temporary differences as of December 31:
1995 1996 ---------- ----------- Deferred revenue............................................ $2,082,000 $13,846,000 Accrued vacation pay........................................ 87,000 118,000 Provision for bad debts..................................... 48,000 1,091,000 Other....................................................... 4,000 -- ---------- ----------- Total deferred tax asset.................................... $2,221,000 $15,055,000 ========== ===========
F-14 92 Tax valuation allowances were provided through March 10, 1995 against the net deferred tax assets of both continuing operations and discontinued operations. In connection with the acquisition purchase accounting, a determination was made that tax valuation allowances were no longer required. A reconciliation of the provision for income taxes to the amount computed by applying the statutory federal income tax rate to income (loss) before income taxes is provided below. The statutory federal income tax rate used was 34% for all periods presented through December 31, 1995 and 35% for the year ended December 31, 1996.
FOR THE PERIOD 1995 YEAR ENDED YEAR ENDED --------------------------- DECEMBER DECEMBER 31, JANUARY 1 TO MARCH 11 TO 31, 1994 MARCH 10 DECEMBER 31 1996 ------------ ------------ ----------- ----------- Federal tax at statutory rate............... $103,000 $ 1,000 $(570,000) $(794,000) State income taxes, net of Federal tax benefit................................... 13,000 -- (68,000) (96,000) Nondeductible goodwill amortization......... 348,000 281,000 Other....................................... 4,000 1,000 3,000 (34,000) Valuation allowance......................... (6,000) 46,000 -- -- -------- ------- --------- --------- Provision for (benefit) from income taxes... $114,000 $48,000 $(287,000) $(643,000) ======== ======= ========= =========
The Company paid taxes of $212,000 and $119,000 for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995, respectively. NOTE 8 -- COMMITMENTS AND CONTINGENCIES COMMITMENTS Future minimum lease payments under noncancelable operating leases, primarily for facilities, are:
OPERATING YEARS ENDING DECEMBER 31: LEASES ------------------------------------------------------------------------ ---------- 1997............................................................... $1,874,000 1998............................................................... 1,959,000 1999............................................................... 1,832,000 2000............................................................... 1,007,000 2001............................................................... 946,000 Thereafter......................................................... 869,000 ---------- Total future minimum lease payments..................................... $8,487,000 ==========
In December 1992, the Company entered into a lease agreement for the Company's headquarters in Herndon, Virginia that extended the lease term through 2002. Subsequent to the acquisition, SAIC re-negotiated the lease with the landlord whereby SAIC has posted a $1,000,000 letter of credit. The Company does not enter directly into any leases; all leases are entered into by SAIC and then SAIC subleases the related assets to the Company under identical terms of the head lease. Lease expense related to the continuing operations based upon space utilized for the year ended December 31, 1994, for the periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 and for the year ended December 31,1996 was $194,000, $36,000, $342,000, and $924,000, respectively. Lease expense incurred by the discontinued operations for the year ended December 31, 1994 and for the periods from January 1, 1995 to March 10, 1995 and March 11, 1995 to December 31, 1995 was $1,079,000, $208,000 and $328,000, respectively. Subsequent to March 10, 1995, the Company generated rental income in 1995 of $135,000 and $187,000 for the year ended December 31, 1996, from two subleases, which was recorded on the same basis as rent expense. F-15 93 NOTE 8 -- COMMITMENTS AND CONTINGENCIES (CONTINUED) CONTINGENCIES The Company is involved as plaintiff and defendant in litigation and administrative proceedings primarily arising in the normal course of its business. In the opinion of management, the Company's recovery, if any, or the Company's liability, if any, under any pending litigation or administrative proceeding will not materially affect its financial condition, results of operations or cash flow. As it relates to registration services, the applicability to the Company of existing laws governing issues such as intellectual property ownership is uncertain. Courts have indicated that, under certain circumstances, Internet service providers could be held responsible for the failure to prevent the distribution of material that infringes on others' copyrights and other intellectual property. As further discussed below, there exists the likelihood that the Company will become involved in future actions regarding disputes over domain names. The future interpretation by the courts relating to the obligation of domain name registration providers to prevent trademark infringement and other legal issues is uncertain. Costs incurred or decisions rendered as a result of any future government inquiry or other proceedings relating to any of the foregoing could have a material adverse effect on the Company's business, financial position and results of operations. The Company has been named as a defendant in a number of lawsuits which have generally involved domain name disputes between trademark owners and domain name holders. Through March 17, 1997, no damages have been awarded to the plaintiffs in any of the domain name lawsuits. The Company's domain name dispute policy seeks to take a neutral position between these competing claims and is designed to address claims that a domain name registered by the Company infringes a third party's trademark. The Company is drawn into such disputes, in part, as a result of claims by trademark owners that the Company is legally required to, upon being requested to do so by a trademark holder, terminate the right it granted to an alleged trademark infringer to register the domain name in question. Further, trademark owners have also alleged that the Company should be required to monitor future domain name registrations and reject registrations of domain names which are identical or similar to their registered trademark. The holders of the domain names registrations in dispute have, in turn, questioned the Company's right to, absent a court order, take any action which restricts or terminates their registration of the domain names in question. The Company intends to vigorously defend itself in all such matters. In the opinion of the management, the outcome of the existing lawsuits will not materially affect the Company's financial condition, results of operations or cash flow. However, such litigation has resulted in, and any future litigation can be expected to result in, substantial legal and other expenses to the Company and a diversion of the efforts of the Company's personnel. See Note 14 "Subsequent Events" (Unaudited). NOTE 9 -- TRANSACTIONS WITH SAIC The financial statements as of and for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 include significant transactions with other SAIC business units involving functions and services (such as cash management, tax administration, accounting, legal, data processing and employee benefit plans) that were provided to the Company by centralized SAIC organizations. The costs of these functions and services have been directly charged and/or allocated to the Company using methods that management believes are reasonable; primarily a percentage of budgeted administrative and overhead costs. Such charges and allocations are not necessarily indicative of the costs that would have been incurred if the Company had been a separate entity. During August 1996, SAIC began charging the Company for corporate services provided by SAIC at a rate equal to two-and-one half percent of annual net revenue. The arrangement may be terminated by either party upon 180 days prior written notice. Amounts charged and allocated to the Company for these functions and services for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 were $516,000 and $1,196,000, respectively, and are principally included in F-16 94 NOTE 9 -- TRANSACTIONS WITH SAIC (CONTINUED) Selling, General and Administrative expenses. Additionally, certain interest charges/credits are allocated by SAIC to the Company (Note 5). Sales as a subcontractor to SAIC for the period from March 11, 1995 to December 31, 1995 and for the year ended December 31, 1996 were $509,000 and $1,505,000, respectively. Due to Parent represents the cumulative net activity of all transactions between the Company and SAIC. NOTE 10 -- EMPLOYEE BENEFIT PLANS SAIC BENEFIT PLANS Employees of the Company participate in various SAIC benefit plans, subject to the applicable eligibility requirements. SAIC charges the Company directly for the costs of such employee benefit plans. Charges related to the administration of the SAIC benefit plans in which employees of the Company participate are included within SAIC general corporate allocations (Notes 1 and 9). In 1995, SAIC merged two of its profit sharing retirement plans into one principal Profit Sharing Retirement Plan in which eligible employees participate. Participants' interests vest 25% per year in the third through sixth year of service. Participants also become fully vested upon reaching age 59 1/2, permanent disability or death. SAIC has an Employee Stock Ownership Plan (the "Plan") in which eligible employees participate. Cash contributions to the Plan are based upon amounts determined annually by the SAIC Board of Directors and are allocated to participants' accounts based on their annual compensation. The vesting requirements for the Plan are the same as for the Profit Sharing Retirement Plan. SAIC has one principal Cash or Deferred Arrangement ("CODA") which allows eligible participants to defer a portion of their income through contributions. Such deferrals are fully vested, are not taxable to the participant until distributed from the CODA upon termination, retirement, permanent disability or death and may be matched by SAIC. SAIC has a Bonus Compensation Plan which provides for bonuses to reward outstanding performance. Bonuses are paid in the form of cash, fully vested shares of SAIC Class A common stock or vesting shares of SAIC Class A common stock. Awards of vesting shares of SAIC Class A common stock vest at the rate of 20%, 20%, 20% and 40% after one, two, three and four years, respectively. During the period from March 11, 1995 to December 31, 1995 and during the year ended December 31, 1996 a total of 24,450 and 53,040 SAIC options were granted to the Company's employees, respectively, with exercise prices ranging from $15.72 to $17.79 and $19.33 to $22.83 per share, respectively, with a weighted average price of $16.17 and $20.51, respectively. In 1995, SAIC adopted the Stock Compensation Plan and the Management Stock Compensation Plan, together referred to as the "Stock Compensation Plans." The Stock Compensation Plans provide for awards of share units to eligible employees, which share units generally correspond to shares of SAIC Class A common stock which are held in trust for the benefit of participants. Participants' interests in these share units vest on a seven year schedule at the rate of one-third at the end of each of the fifth, sixth and seventh years following the date of the award. SAIC also has an Employee Stock Purchase Plan which allows eligible employees to purchase shares of SAIC's Class A common stock, with SAIC currently contributing 5% of the existing fair market value. PRE-ACQUISITION BENEFIT PLANS Prior to the acquisition, the Company had a plan (the "401(k) Plan") covering substantially all employees which provided for employee savings under Internal Revenue Code Section 401(k). Eligible employees under the 401(k) Plan contributed from one percent to ten percent of gross pay to F-17 95 NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) PRE-ACQUISITION BENEFIT PLANS (CONTINUED) their plan savings account. The Company matched employee contributions to the 401(k) Plan, up to six percent of base salary. Contributions to the 401(k) Plan for the year ended December 31, 1994 and for the period from January 1, 1995 to March 10, 1995 were not significant. At the time of SAIC's acquisition of the Company, all contributions to the 401(k) Plan ceased and the 401(k) Plan was subsequently terminated. 1996 STOCK INCENTIVE PLAN The 1996 Stock Incentive Plan (the "Incentive Plan") of the Company was adopted by the Board of Directors on September 18, 1996. The Incentive Plan provides for awards in the form of restricted shares, stock units, options (including incentive stock options ("ISOs") and nonstatutory stock options ("NSOs")) or stock appreciation rights ("SARs"). Employees, outside directors, consultants and advisors of the Company are eligible for the grant of restricted shares, stock units, SARs and NSOs. Only employees are eligible for the grant of ISOs. A total of 2,306,250 shares of Common Stock has been initially reserved for issuance under the Incentive Plan. Such number of shares may be increased by up to 2% of the total number of common shares of the Company outstanding at the end of the most recent calendar year, subject to a cumulative increase of 1,000,000 common shares. Consideration for each award under the Incentive Plan will be established by the Compensation Committee of the Board of Directors, but in no event will the option price for ISOs be less than 100% of the fair market value of the stock on the date of grant. Awards will have such terms and be exercisable in such manner and at such times as the Compensation Committee may determine. However, each ISO must expire within a period of not more than ten years from the date of grant. As of December 31, 1996, a total of 100,900 ISOs and 1,124,825 NSOs have been granted under the Incentive Plan, of which 461,250 will be exercisable at $11.25 per share and 764,475 at $14.00 per share. The stock options become exercisable one year after the date of the grant, vest 30%, 30%, 20% and 20% on each anniversary date of the grant and have a term of five years. No options have been exercised or forfeited. The weighted average contractual life of options outstanding at December 31, 1996 was 4.9 years. No restricted shares, stock units or SARs have been granted to date. PRO FORMA DISCLOSURES The weighted-average fair value of the options granted during the period from March 11, 1995 to December 31, 1995 and during the year ended December 31, 1996 under the SAIC Bonus Compensation Plan were estimated at $3.66 and $4.30, respectively, and $2.76 for the options granted during the year ended December 31, 1996 under the Company's Incentive Plan using the Black-Scholes model. The following weighted average assumptions were used in calculating the option fair values:
NSI STOCK SAIC STOCK OPTIONS OPTIONS ------------------------------ ---------- MARCH 11, 1995 YEAR ENDED YEAR ENDED TO DECEMBER DECEMBER DECEMBER 31, 1995 31, 1996 31, 1996 -------------- ---------- ---------- Expected life (years).............................. 4.0 4.0 4.0 Risk-free interest rate............................ 6.45% 5.91% 5.98% Volatility......................................... 0.00% 0.00% 0.00% Dividend yield..................................... 0.00% 0.00% 0.00%
Under the above models, the total value of SAIC stock options granted during 1995 and 1996 was approximately $89,000 and $228,000, respectively, and $3,379,000 for the NSI stock options granted in 1996, all of which would be amortized ratably on a pro forma basis over the four year option terms. Had the Company recorded compensation costs for these plans in accordance with SFAS No. 123, the F-18 96 NOTE 10 -- EMPLOYEE BENEFIT PLANS (CONTINUED) PRO FORMA DISCLOSURES (CONTINUED) Company's pro forma net loss would have been $1,430,000 for the period March 11, 1995 to December 31, 1995 and $1,763,000 for the year ended December 31, 1996. Net loss per share would have been $ for the year ended December 31, 1996. NOTE 11 -- DISCONTINUED OPERATIONS As discussed in Note 1, in November 1995 SAIC adopted a plan to transfer the Company's government-based business to SAIC in order for NSI to focus on the growth of the commercial business. Such transfer was substantially completed in February 1996. Prior to SAIC's acquisition of NSI, the portion of the Company's business relating to the minority-based government business had been transferred into a separately-owned entity. The activities of both the minority-based government business and the remaining government-based business are reflected as discontinued operations in the financial statements of the Company for all periods presented. Net income (loss) from discontinued operations exclude general corporate overhead of the Company. No gain or loss was incurred as a consequence of the transfer of these businesses. The net liabilities for discontinued operations consisted of the following as of December 31, 1995: Assets: Current............................................................ $5,306,000 Non-current........................................................ 249,000 ---------- 5,555,000 ---------- Liabilities: Current............................................................ 5,763,000 Non-current........................................................ -- ---------- 5,763,000 ---------- Net liabilities -- discontinued operations.............................. $ (208,000) ==========
Summary operating results of the discontinued operations were as follows:
FOR THE PERIOD 1995 YEAR ENDED ---------------------------- DECEMBER 31, JANUARY 1 TO MARCH 11 TO 1994 MARCH 10 DECEMBER 31 ------------ ------------ ----------- Revenues............................................ $ 25,264,000 $ 4,270,000 $ 7,882,000 Costs and expenses.................................. (26,338,000) (5,478,000) (7,773,000) ------------ ------------ ----------- Income (loss) from discontinued operations before income taxes...................................... (1,074,000) (1,208,000) 109,000 Provision for income taxes.......................... 95,000 167,000 137,000 ------------ ------------ ----------- Loss from discontinued operations, net of income taxes............................................. $ (1,169,000) $ (1,375,000) $ (28,000) ============ ============ ===========
NOTE 12 -- EFFECT OF NEW ACCOUNTING PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share." This statement establishes standards for computing and presenting earnings per share, simplifying previous standards for computing earnings per share ("EPS") and making them comparable to international standards. It replaces the presentation of primary EPS with a presentation of basic EPS, and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. Basic EPS excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares F-19 97 NOTE 12 -- EFFECT OF NEW ACCOUNTING PRONOUNCEMENT (CONTINUED) outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. SFAS No. 128 requires restatement of all prior period earnings per share data presented, and is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Company will adopt this statement during the fourth quarter of 1997, as required. Accordingly, all prior period EPS data will be restated. To illustrate the effect of adoption, the Company has elected to disclose pro forma basic and diluted EPS amounts computed using SFAS 128, as permitted by the standard. The pro forma basic and diluted EPS for the year ended December 31, 1996, and for the three months ended March 31, 1996 and 1997 are set forth below:
THREE MONTHS ENDED MARCH 31, YEAR ENDED ---------------------------------- DECEMBER 31, 1996 1996 1997 ----------------- ----------- ----------- Pro forma basic earnings per share............... $ $ $ ================= =========== =========== Pro forma diluted earnings per share............. $ $ $ ================= =========== ===========
Basic and diluted EPS amounts will be presented once the initial offering price is known. NOTE 13 -- RECAPITALIZATION On June 26, 1997 the Board of Directors amended the Certificate of Incorporation to provide for two classes of common stock, designated as Class A and Class B. The accompanying financial statements have been adjusted to reflect this change. NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED) Stock Incentive Plan On April 18, 1997, the Board of Directors increased the number of shares initially reserved for issuance under the Incentive Plan to 2,556,250. Between January 1, 1997 and June 30, 1997, the Company granted options to purchase 294,000 shares of the Company's Class A common stock at $14.00 per share. In addition, options to purchase 23,000 shares were canceled during that period. Commitments On May 30, 1997, the Company entered into an operating lease for additional office facilities for the period from May 30, 1997 through July 31, 2002. During the period from January 1, 1997 through May 31, 1997, the Company acquired $2,455,000 of equipment under a capital lease. Contingencies On March 20, 1997, PG Media, Inc., a New York-based corporation ("PG Media"), filed a lawsuit against the Company in the United States District Court, Southern District of New York alleging that the Company had restricted access to the Internet by not adding TLDs in violation of antitrust laws under the Sherman Act. The Company has answered the complaint, but no motions are pending and no schedule has yet been set by the court for these proceedings. In addition, the Company recently received written direction from the NSF not to take any action to create additional TLDs or to add any new TLDs to the Internet root servers until further guidance is provided by the NSF. The Company believes that it has meritorious defenses, and intends to vigorously defend itself against such claims. On June 27, 1997, SAIC received a Civil Investigative Demand ("CID") from the U.S. Department of Justice ("DOJ") issued in connection with an investigation to determine whether there is, has been, F-20 98 NOTE 14 -- SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED) or may be a violation of antitrust laws under the Sherman Act relating to Internet registration products and services. The CID seeks documents and information from SAIC and the Company relating to their Internet registration business. Neither SAIC nor the Company is aware of the scope or nature of the investigation. The Company cannot predict whether a civil action will ultimately be filed by the DOJ or by private litigants as a result of the DOJ investigation or, if filed, what such action would entail. The Company is unable to predict the form of relief that might be sought in such an action or that might be awarded by a court or entered as a result of any settlement between the Company and the DOJ or private litigants. Any such relief could have a material adverse effect on the Company's financial condition and results of operations. F-21 99 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------ TABLE OF CONTENTS
PAGE ----- Prospectus Summary........... 3 Risk Factors................. 8 Use of Proceeds.............. 23 Dividend Policy.............. 23 Capitalization............... 24 Dilution..................... 25 Selected Financial Data...... 26 Management's Discussion and Analysis of Financial Condition and Results of Operations................. 28 Business..................... 39 Management................... 54 Relationship with SAIC and Certain Transactions....... 63 Principal Stockholder........ 66 Description of Capital Stock...................... 67 Shares Eligible for Future Sale....................... 72 Underwriting................. 74 Legal Matters................ 75 Experts...................... 75 Additional Information....... 75 Index to Financial Statements................. F-1
------------------ UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES NETWORK SOLUTIONS, INC. [LOGO] CLASS A COMMON STOCK ----------------------- PROSPECTUS ----------------------- HAMBRECHT & QUIST J.P. MORGAN & CO. PAINEWEBBER INCORPORATED , 1997 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 100 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the National Association of Securities Dealers, Inc. filing fee.
PAYABLE BY REGISTRANT ---------- SEC registration fee.......................................... $ 10,606 National Association of Securities Dealers, Inc. filing fee... 4,000 Nasdaq Filing Fee............................................. * Blue Sky fees and expenses.................................... * Accounting fees and expenses.................................. * Legal fees and expenses....................................... * Printing and engraving expenses............................... * Registrar and transfer agent's fees........................... * Miscellaneous fees and expenses............................... * -------- Total.................................................... $ * ========
- --------------- * To be filed by amendment. All expenses listed above are estimates except for the SEC registration fee and the NASD filing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law provides for the indemnification of officers, directors, and other corporate agents in terms sufficiently broad to indemnify such persons under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Act"). Article VIII of the Registrant's Amended and Restated Certificate of Incorporation (Exhibit 3(i) hereto) provides for indemnification of the Registrant's directors, officers, employees and other agents to the extent and under the circumstances permitted by the Delaware General Corporation Law. The Registrant has also entered into agreements with its directors and officers that will require the Registrant, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers to the fullest extent not prohibited by law. The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the Underwriters of the Registrant, its directors and officers, and by the Registrant of the Underwriters, for certain liabilities, including liabilities arising under the Act, and affords certain rights of contribution with respect thereto. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Since January 1, 1994, the Registrant has issued and sold (without payment of any selling commission to any person) the following unregistered securities: 1. From October 14, 1996 to June 30, 1997, the Registrant granted incentive stock options to purchase an aggregate of 100,900 shares of the Registrant's Class A Common Stock to employees, officers and directors of the Registrant under its 1996 Stock Incentive Plan at exercise prices ranging from $11.25 to $14.00 per share. Certain of these options vest over a period of time following their respective dates of grant pursuant to the Registrant's 1996 Stock Incentive Plan. II-1 101 2. From October 14, 1996 to June 30, 1997, the Registrant granted nonstatutory stock options to purchase an aggregate of 1,395,825 shares of the Registrant's Class A Common Stock to employees, officers and directors of the Company under its 1996 Stock Incentive Plan at exercise prices ranging from $11.25 to $14.00 per share. Certain of these options vest over a period of time following their respective dates of grant, pursuant to the Registrant's 1996 Stock Incentive Plan. The sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the Securities Act, as transactions by an issuer not involving a public offering or transactions pursuant to compensatory benefit plans and contracts relating to compensation as provided under such Rule 701. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and instruments issued in such transactions. All recipients had access, through their relationship with the Company, to information about the Registrant. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT - ------ ------------------------------------------------------------------------------------- 1.1* Form of Underwriting Agreement. 3(i) Second Amended and Restated Certificate of Incorporation. 3(ii) Bylaws of the Registrant, as amended. 4.1* Form of Common Stock Certificate. 4.2 Reference is made to Exhibits 3(i) and 3(ii). 5.1* Opinion of Pillsbury Madison & Sutro LLP. 10.1 Cooperative Agreement between the National Science Foundation and Network Solutions, Inc., as amended by Amendments Nos. 1, 2, 3 and 5. 10.2 Amendment No. 4 to the Cooperative Agreement dated September 13, 1995. 10.3 Master Services Agreement for System Management Services dated January 21, 1997 by and between NationsBanc Services, Inc. and Network Solutions, Inc. 10.4 1996 Stock Incentive Plan and forms of agreements thereunder. 10.5* Corporate Services Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.6* Tax Sharing Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.7* Registration Rights Agreement between Network Solutions, Inc. and Science Applications International Corporation. 10.8* Noncompetition and Corporate Opportunities Agreement between Network Solutions, Inc. and Science Applications International Corporation. 11.1 Statement of computation of earnings per share. 23.1 Consent of Price Waterhouse LLP (see Page II-6). 23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1). 24.1 Power of Attorney (see Page II-4). 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. (b) FINANCIAL STATEMENT SCHEDULES Schedules other than those referred to above have been omitted because they are not applicable or not required or because the information is included elsewhere in the Financial Statements or the notes thereto. II-2 102 ITEM 17 UNDERTAKINGS Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, as amended, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, as amended, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) The Registrant will provide to the underwriters at the closing(s) specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. II-3 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Herndon, State of Virginia, on the 2nd day of July, 1997. NETWORK SOLUTIONS, INC. BY /s/ GABRIEL A. BATTISTA ------------------------------------ Gabriel A. Battista Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gabriel A. Battista and Robert J. Korzeniewski, and each of them, his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and any registration statement relating to the offering covered by this Registration Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933 and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------- ----------------------------------- ------------- /s/ GABRIEL A. BATTISTA Chief Executive Officer and July 2, 1997 - ------------------------------------- Director Gabriel A. Battista /s/ ROBERT J. KORZENIEWSKI Chief Financial Officer (Principal July 2, 1997 - ------------------------------------- Financial Officer) Robert J. Korzeniewski /s/ RUSSELL L. HELBERT Controller (Principal Accounting July 2, 1997 - ------------------------------------- Officer) Russell L. Helbert /s/ MICHAEL A. DANIELS Chairman of the Board July 2, 1997 - ------------------------------------- Michael A. Daniels /s/ J. ROBERT BEYSTER Director July 2, 1997 - ------------------------------------- J. Robert Beyster /s/ CRAIG I. FIELDS Director July 2, 1997 - ------------------------------------- Craig I. Fields
II-4 104
NAME TITLE DATE - ------------------------------------- ----------------------------------- ------------- - ------------------------------------- Director John E. Glancy /s/ WILLIAM A. ROPER, JR. Director July 2, 1997 - ------------------------------------- William A. Roper, Jr. /s/ STRATTON D. SCLAVOS Director July 2, 1997 - ------------------------------------- Stratton D. Sclavos /s/ DONALD N. TELAGE Director July 2, 1997 - ------------------------------------- Donald N. Telage
II-5 105 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated March 17, 1997, except as to Note 13 which is as of June 26, 1997, relating to the financial statements of Network Solutions, Inc., for the year ended December 31, 1996 and for the period from March 11, 1995 to December 31, 1995 and of our report dated March 17, 1997, except as to Note 13 which is as of June 26, 1997, relating to the financial statements of Network Solutions, Inc., for the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994, which appear in such Prospectus. We also consent to the application of such reports to the Financial Statement Schedule for the year ended December 31, 1996, the period from March 11, 1995 to December 31, 1995, the period from January 1, 1995 to March 10, 1995 and for the year ended December 31, 1994 listed under Item 16(b) of this Registration Statement when such schedule is read in conjunction with the financial statements referred to in our reports. The audits referred to in such reports also included this schedule. We also consent to the reference to us under the heading "Experts" in such Prospectus. PRICE WATERHOUSE LLP Falls Church, VA June 30, 1997 II-6 106 SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
================================================================================================================ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS ------------------------- CHARGED TO BALANCE AT CHARGED TO OTHER BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- BALANCE AT DESCRIPTION OF YEAR EXPENSES DESCRIBE DESCRIBE END OF YEAR - ---------------------------------------------------------------------------------------------------------------- Year ended December 31, 1994 Allowance for doubtful accounts, included in net assets (liabilities) of discontinued operations...................... $ 345,000 $ 464,000 $ -- $ -- $ 809,000 Deferred tax valuation allowance, continuing operations........... 61,000 (6,000) -- 61,000 (6,000) Deferred tax valuation allowance, discontinued operations......... 355,000 137,000 -- 355,000 137,000 For the period from January 1, 1995 to March 10, 1995 Allowance for doubtful accounts, included in net assets (liabilities) of discontinued operations...................... 809,000 344,000 -- -- 1,153,000 Deferred tax valuation allowance, continuing operations........... $ (6,000) $ 46,000 $ -- $ 6,000 $ 46,000(1) Deferred tax valuation allowance, discontinued operations......... 137,000 314,000 -- 137,000 314,000(1) - ---------------------------------------------------------------------------------------------------------------- For the period from March 11, 1995 to December 31, 1995 Allowance for doubtful accounts, continuing operations........... $ -- $ 124,000 $ 1,994,000(2) $ -- $ 2,118,000 Allowance for doubtful accounts, included in net assets (liabilities) of discontinued operations...................... 1,153,000 465,000 -- -- 1,618,000 Year ended December 31, 1996 Allowance for doubtful accounts, continuing operations........... 2,118,000 3,597,000 19,270,000(2) 9,546,000 (3) 15,439,000 Allowance for doubtful accounts, included in net assets (liabilities) of discontinued operations...................... $1,618,000 $ -- $ -- $1,618,000 (4) $ --
- --------------- (1) In connection with the acquisition purchase accounting, a determination was made that the tax valuation allowances were no longer required. (See Note 7 of Notes to Financial Statements.) (2) Charged to allowance for deferred revenue and the Internet fund liability (See Notes 2 and 3 of Notes to Financial Statements). (3) Amounts are write-offs of uncollectible accounts receivable. (4) Disposition associated with discontinued operations (See Note 11 of Notes to Financial Statements). 107 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION OF DOCUMENT NUMBER - ------ ---------------------------------------------------------------------------- ------ 1.1* Form of Underwriting Agreement.............................................. 3(i) Second Amended and Restated Certificate of Incorporation.................... 3(ii) Bylaws of the Registrant, as amended........................................ 4.1* Form of Common Stock Certificate............................................ 4.2 Reference is made to Exhibits 3(i) and 3(ii)................................ 5.1* Opinion of Pillsbury Madison & Sutro LLP.................................... 10.1 Cooperative Agreement between the National Science Foundation and Network Solutions, Inc., as amended by Amendments Nos. 1, 2, 3 and 5................ 10.2 Amendment No. 4 to the Cooperative Agreement dated September 13, 1995....... 10.3 Master Services Agreement for System Management Services dated January 21, 1997 by and between NationsBanc Services, Inc. and Network Solutions, Inc......................................................................... 10.4 1996 Stock Incentive Plan and forms of agreements thereunder................ 10.5* Corporate Services Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.6* Tax Sharing Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.7* Registration Rights Agreement between Network Solutions, Inc. and Science Applications International Corporation...................................... 10.8* Noncompetition and Corporate Opportunities Agreement between Network Solutions, Inc. and Science Applications International Corporation.......... 11.1 Statement of computation of earnings per share.............................. 23.1 Consent of Price Waterhouse LLP (see Page II-6)............................. 23.2* Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).......... 24.1 Power of Attorney (see Page II-4)........................................... 27.1 Financial Data Schedule.
- --------------- * To be filed by amendment. EX-3.I 2 CERTIFICATE OF INCORPORATION 1 EXHIBIT 3(i) SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION NETWORK SOLUTIONS, INC, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is Network Solutions, Inc. The Corporation was originally incorporated under the name NSI Merger Corporation. 2. The Corporation's original Certificate of Incorporation was filed with the Secretary of State on July 16, 1996. 3. The Corporation's Amended and Restated Certificate of Incorporation was filed with the Secretary of State on September 19, 1996. 4. The Corporation's Amended and Restated Certificate of Incorporation was amended to change the name of the Corporation to Network Solutions, Inc. in an Agreement and Plan of Merger filed with the Secretary of State on October 29, 1996. 5. The Second Amended and Restated Certificate of Incorporation of this corporation, in the form attached hereto as Exhibit A, has been duly adopted by the Board of Directors and by the sole stockholder of the corporation in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. 6. The Second Amended and Restated Certificate of Incorporation so adopted reads in full as set forth in Exhibit A attached hereto and is hereby incorporated by reference. IN WITNESS WHEREOF, Network Solutions, Inc. has caused this Second Amended and Restated Certificate of Incorporation to be signed by its Chief Financial Officer and attested to by its Secretary this 2nd day of July 1997. /s/ ROBERT J. KORZENIEWSKI --------------------------------- Robert J. Korzeniewski Chief Financial Officer Attest: /s/ ALOMA H. AVERY --------------------------------- Aloma H. Avery Secretary 2 EXHIBIT A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NETWORK SOLUTIONS, INC. ARTICLE I The name of the Corporation is Network Solutions, Inc. (hereinafter the "Corporation"). ARTICLE II The registered office of the Corporation within the State of Delaware is located at 9 East Loockerman Street, City of Dover, County of Kent, Dover, Delaware 19901. The name of its registered agent at that address is National Corporate Research, Ltd. ARTICLE III The nature of the business or purposes to be conducted or promoted is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware (the "GCL"). ARTICLE IV A. The total number of shares of stock that the Corporation shall have authority to issue is One-Hundred Forty Million (140,000,000) of which (i) One-Hundred Million (100,000,000) shares shall be shares of Class A Common Stock, $.001 par value per share (the "Class A Common Stock"), and Thirty Million (30,000,000) shares shall be shares of Class B Common Stock, $.001 par value per share (the "Class B Common Stock") (the Class A Common Stock and the Class B Common Stock being collectively referred to herein as the "Common Stock"), and (ii) Ten Million (10,000,000) shares shall be shares of Preferred Stock, $.001 par value per share (the "Preferred Stock"). B. The number of authorized shares of any class or classes of stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the votes entitled to be cast by the holders of the Common Stock of the Corporation, voting together as a single class, irrespective of -1- 3 the provisions of Section 242(b)(2) of the GCL or any corresponding provision hereinafter enacted. C. Upon the filing of this Amended and Restated Certificate of Incorporation, each issued and outstanding share of Common Stock as of July 2, 1997, shall be automatically converted into one share of Class B Common Stock. D. The following is a statement of the powers, preferences, and relative participating, optional or other special rights and qualifications, limitations and restrictions of the Class A Common Stock and Class B Common Stock of the Corporation: 1. Except as otherwise set forth below in this ARTICLE IV, the powers, preferences and relative participating, optional or other special rights and qualifications, limitations or restrictions of the Class A Common Stock and Class B Common Stock shall be identical in all respects. 2. Subject to the rights of the holders of Preferred Stock, and subject to any other provisions of this Second Amended and Restated Certificate of Incorporation, holders of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and other distributions in cash, stock or property of the Corporation as may be declared thereon by the Board of Directors of the Corporation from time to time out of assets or funds of the Corporation legally available therefor. If any dividend or other distribution in cash or other property is paid with respect to Class A Common Stock or with respect to Class B Common Stock (other than dividends or other distributions payable in shares of Common Stock), a like dividend or other distribution in cash or other property shall also be paid with respect to shares of the other class of Common Stock, in an amount equal per share. In the case of dividends or other distributions payable in Common Stock, including distributions pursuant to stock splits or divisions of Common Stock of the Corporation, only shares of Class A Common Stock shall be paid or distributed with respect to Class A Common Stock and only shares of Class B Common Stock shall be paid or distributed with respect to Class B Common Stock. The number of shares of Class A Common Stock and Class B Common Stock so distributed shall be equal in number on a per share basis. Neither the shares of Class A Common Stock nor the shares of Class B Common Stock may be reclassified, subdivided or combined unless such reclassification, subdivision or combination occurs simultaneously and in the same proportion for each class. -2- 4 3. (a) At every meeting of the stockholders of the Corporation, every holder of Class A Common Stock shall be entitled to one vote in person or by proxy for each share of Class A Common Stock standing in his or her name on the transfer books of the Corporation, and every holder of Class B Common Stock shall be entitled to ten votes in person or by proxy for each share of Class B Common Stock standing in his or her name on the transfer books of the Corporation in connection with the election of directors and all other matters submitted to a vote of the stockholders; provided, however, that with respect to any proposed conversion subsequent to a Tax-Free Spin-Off (as defined in paragraph (D)(6)(b) below) of the shares of Class B Common Stock into shares of Class A Common Stock pursuant to paragraph (D)(6)(b) below, each holder of a share of Common Stock, irrespective of class, shall have one vote in person or by proxy for each share of Common Stock standing in his or her name on the transfer books of the Corporation. Except as may be otherwise required by this ARTICLE IV, the holders of Class A Common Stock and Class B Common Stock shall vote together as a single class, subject to any voting rights which may be granted to holders of Preferred Stock, on all matters submitted to a vote of the holders of Common Stock. (b) Subject to any rights of the holders of Preferred Stock, the provisions of this Second Amended and Restated Certificate of Incorporation shall not be modified, revised, altered or amended, repealed or rescinded in whole or in part, without the approval of a majority of the votes entitled to be cast by the holders of the Class A Common Stock and the Class B Common Stock, voting together as a single class; provided, however, that with respect to any proposed amendment of this Second Amended and Restated Certificate of Incorporation which would alter or change the powers, preferences or special rights of the shares of Class A Common Stock or Class B Common Stock so as to affect them adversely, the approval of a majority of the votes entitled to be cast by the holders of the shares affected by the proposed amendment, voting separately as a class, shall be obtained in addition to the approval of a majority of the votes entitled to be cast by the holders of the Class A Common Stock and the Class B Common Stock voting together as a single class as hereinbefore provided. Any increase in the authorized number of shares of any class or classes of stock of the Corporation or creation, authorization or issuance of any securities convertible into, or warrants, options or similar rights to purchase, acquire or receive, shares of any such class or classes of stock shall be -3- 5 deemed not to affect adversely the powers, preferences or special rights of the shares of Class A Common Stock or Class B Common Stock. Neither the outcome of any vote with respect to any proposed conversion subsequent to a Tax-Free Spin-Off of the shares of Class B Common Stock into shares of Class A Common Stock pursuant to paragraph (D)(6)(b) below nor the occurrence of the events described in the last sentence of paragraph (D)(6)(b)(iii) below shall be deemed to be a modification, revision, alteration, amendment, repeal or rescission of the provisions of this Second Amended and Restated Certificate of Incorporation. (c) Every reference in this Second Amended and Restated Certificate of Incorporation to a majority or other proportion of shares of Common Stock, Class A Common Stock or Class B Common Stock shall refer to such majority or other proportion of the votes to which such shares of Common Stock, Class A Common Stock or Class B Common Stock, as applicable, are entitled. 4. In the event of any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, after payment in full of the amounts required to be paid to the holders of Preferred Stock, the remaining assets and funds of the Corporation shall be distributed pro rata to the holders of Class A Common Stock and Class B Common Stock. For the purposes of this paragraph (D)(4), the voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the assets of the Corporation or a consolidation or merger of the Corporation with one or more other corporations (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary. 5. In the event of (i) any reorganization or any consolidation of the Corporation with one or more other corporations or a merger of the Corporation with another corporation unless (ii) immediately following such event, and based solely on the securities issued in connection therewith, a majority of the total voting power of the successor corporation is held by Persons that were stockholders of the Corporation immediately prior to such event, each holder of a share of Class A Common Stock shall be entitled to receive with respect to such share the same kind and amount of shares of stock and other securities and property (including cash) receivable upon such -4- 6 reorganization, consolidation or merger by a holder of a share of Class B Common Stock and each holder of a share of Class B Common Stock shall be entitled to receive with respect to such share the same kind and amount of shares of stock and other securities and property (including cash) receivable upon such reorganization, consolidation or merger by a holder of a share of Class A Common Stock. 6. (a) Prior to the date on which shares of Class B Common Stock are distributed to stockholders of SAIC (as defined in paragraph (D)(6)(b) below), or to stockholders of the Class B Transferee (as defined in paragraph (D)(6)(b) below) in a Tax-Free Spin-Off, each record holder of shares of Class B Common Stock may convert from time to time any or all of such shares into an equal number of shares of Class A Common Stock by surrendering the certificates for such shares, accompanied by any required tax transfer stamps and by a written notice by such record holder to the Corporation stating that such record holder desires to convert such shares of Class B Common Stock into the same number of shares of Class A Common Stock and requesting that the Corporation issue all of such shares of Class A Common Stock to Persons (as defined in paragraph (D)(6)(b) below) named therein, setting forth the number of shares of Class A Common Stock to be issued to each such Person and the denominations in which the certificates therefor are to be issued. To the extent permitted by law, such voluntary conversion shall be deemed to have been effected at the close of business on the date of such surrender. Following a Tax-Free Spin-Off, shares of Class B Common Stock shall no longer be convertible into shares of Class A Common Stock except as set forth in paragraph (D)(6)(b) below. (b)(i) Prior to a Tax-Free Spin-Off, each share of Class B Common Stock shall automatically convert into one share of Class A Common Stock immediately prior to the transfer of such share if, after such transfer, such share is not Beneficially Owned (as defined below) by SAIC or, as set forth below in this paragraph (D)(6)(b), by the Class B Transferee or any subsidiary of the Class B Transferee. Shares of Class B Common Stock shall not convert into shares of Class A Common Stock (x) in any transfer effected in connection with a distribution of Class B Common Stock as a spin-off, split-up or split-off to stockholders of SAIC or stockholders of the Class B Transferee intended to be on a tax-free basis under the Internal Revenue Code of 1986, as amended from time to time (the "Code") (a "Tax-Free Spin-Off") or (y) except as otherwise set forth below in this paragraph (D)(6)(b), -5- 7 in any transfer after a Tax-Free Spin-Off. For purposes of this paragraph (D)(6), a Tax-Free Spin-Off shall be deemed to have occurred at the time shares are first transferred to stockholders of SAIC or stockholders of the Class B Transferee, as the case may be, following receipt of an affidavit described in clauses (vi) or (vii) of the first sentence of paragraph (D)(6)(d) below. For purposes of this paragraph (D)(6), Article X and Article XI, "SAIC" shall mean Science Applications International Corporation, a Delaware corporation, all successors to Science Applications International Corporation by way of merger, consolidation or sale of all or substantially all its assets, and all corporations, partnerships, joint ventures, associations and other entities in which Science Applications International Corporation Beneficially Owns (as defined below), directly or indirectly, 50% or more of the outstanding voting stock, voting power or similar voting interests ("Voting Interests") (each, a "Subsidiary Entity"), but which shall not include the Corporation or any Subsidiary Entity in which the Corporation Beneficially Owns, directly or indirectly, 50% or more of the outstanding Voting Interests. For purposes of this paragraph (D)(6), ARTICLE X and ARTICLE XI, the terms "Beneficially Own," "Beneficially Owns" and "Beneficially Owned" shall have the meanings ascribed to such terms in Rule 13d-3 of the General Rules and Regulations of the Securities Exchange Act of 1934, as in effect on July 2, 1997. (ii) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock representing more than a 50% equity interest in the then outstanding shares of Common Stock taken as a whole transferred in a single transaction to one Person who is not an affiliate of SAIC (together with its successors, the "Class B Transferee") or to the Class B Transferee and any Subsidiary Entity of the Class B Transferee, and shares of Class B Common Stock transferred among a Class B Transferee and any Subsidiary Entity thereof, shall not automatically convert to Class A Common Stock upon the transfer of such shares. Any shares of Class B Common Stock retained by SAIC following any such transfer of shares of Class B Common Stock to the Class B Transferee shall automatically convert into shares of Class A Common Stock upon such transfer. For purposes of this paragraph (D)(6), the term "Person" shall mean any individual, firm, corporation or other entity; each reference to an "individual" (or to a "record holder" of shares, if an individual) shall be deemed to include in his or her representative capacity a guardian, committee, executor, -6- 8 administrator or other legal representative of such individual or record holder. (iii) In the event of a Tax-Free Spin-Off, shares of Class B Common Stock shall automatically convert into shares of Class A Common Stock on the fifth anniversary of the date on which shares of Class B Common Stock are first transferred to stockholders of SAIC or the stockholders of the Class B Transferee, as the case may be, in a Tax-Free Spin-Off unless, prior to such Tax-Free Spin-Off, SAIC or the Class B Transferee, as the case may be, delivers to the Corporation the written advice of counsel, reasonably satisfactory to the Corporation, to the effect that (x) such conversion could adversely affect the ability of SAIC or the Class B Transferee, as the case may be, to obtain a favorable ruling from the Internal Revenue Service that the distribution would be a Tax-Free Spin-Off under the Code or (y) the Internal Revenue Service has adopted a general non-ruling policy on tax-free spinoffs and that such conversion could adversely affect the status of the transaction as a Tax-Free Spin-Off. If such written advice of counsel is received, approval of such conversion shall be submitted to a vote of the holders of the Common Stock as soon as practicable after the fifth anniversary of the Tax-Free Spin-Off. At the meeting of stockholders called for such purpose, every holder of Common Stock shall be entitled to one vote (irrespective of the voting rights provided for such shares under paragraph (D)(3)(a) above) in person or by proxy for each share of Common Stock standing in his or her name on the transfer books of the Corporation. Approval of such conversion shall require the approval of a majority of the votes, on the per share voting basis provided in the preceding sentence, entitled to be cast by the holders of the Class A Common Stock and Class B Common Stock present and voting, voting together as a single class, and the holders of the Class B Common Stock shall not be entitled to a separate class vote. Such conversion shall be effective on the date on which such approval is given at a meeting of stockholders called for such purpose. Notwithstanding the foregoing, if SAIC or the Class B Transferee, as the case may be, delivers to the Corporation prior to such anniversary the written advice of counsel, reasonably satisfactory to the Corporation, to the effect that such vote could adversely affect the status of the transaction as a Tax-Free Spin-Off (including without limitation the ability to obtain a favorable ruling from the Internal Revenue Service), such vote shall not be held and no such conversion shall take place. Upon delivery of such written advice of counsel as to such vote, and -7- 9 the further advice that the continued existence of this paragraph (D)(6)(b)(iii) itself could adversely affect the status of the transaction as a Tax-Free Spin-Off (including without limitation the ability to obtain a favorable ruling from the Internal Revenue Service), then this paragraph (D)(6)(b)(iii) shall thereafter be null and void and no longer be deemed to be part of this Second Amended and Restated Certificate of Incorporation. (iv) If at any time prior to a Tax-Free Spin-Off SAIC or a Class B Transferee shall cease respectively to Beneficially Own a number of outstanding shares of Class B Common Stock at least equal to 30% of the economic ownership represented by the aggregate number of shares of Common Stock then outstanding, then each share of Class B Common Stock Beneficially Owned by such less than 30% owner shall automatically convert into one share of Class A Common Stock. (v) The Corporation will provide notice of any automatic conversion of all outstanding shares of Class B Common Stock to holders of record as soon as practicable after the conversion; provided, however, that the Corporation may satisfy such notice requirement by providing such notice prior to conversion. Such notice shall be provided by mailing notice of such conversion first class postage prepaid, to each holder of record of the Common Stock, at such holder's address as it appears on the transfer books of the Corporation; provided, however, that no failure to give such notice nor any defect therein shall affect the validity of the automatic conversion of any shares of Class B Common Stock. Each such notice shall state, as appropriate, the following: (w) the automatic conversion date; (x) that all outstanding shares of Class B Common Stock are automatically converted; (y) the place or places where certificates for such shares are to be surrendered for conversion; and (z) that no dividends will be declared on the shares of Class B Common Stock converted after such conversion date. Immediately upon such conversion, the rights of the holders of shares of Class B Common Stock as such shall cease and such holders shall be treated for all purposes as having become the record owners of the shares of Class A Common Stock issuable upon such -8- 10 conversion; provided, however, that such Persons shall be entitled to receive when paid any dividends declared on the Class B Common Stock as of a record date preceding the time of such conversion and unpaid as of the time of such conversion, subject to paragraph (D)(6)(f) below. (c) Prior to a Tax-Free Spin-Off, holders of shares of Class B Common Stock may (i) sell or otherwise dispose of or transfer any or all of such shares held by them, respectively, only in connection with a transfer which meets the qualifications of paragraph (D)(6)(d) below, and under no other circumstances, or (ii) convert any or all of such shares into shares of Class A Common Stock as provided in paragraph (D)(6)(a) above. Prior to a Tax-Free Spin-Off, no one other than those Persons in whose names shares of Class B Common Stock originally are registered on the stock ledger of the Corporation, or transferees or successive transferees who receive shares of Class B Common Stock in connection with a transfer which meets the qualifications set forth in paragraph (D)(6)(d) below, shall by virtue of the acquisition of a certificate for shares of Class B Common Stock have the status of an owner or holder of shares of Class B Common Stock or be recognized as such by the Corporation or be otherwise entitled to enjoy for his or her own benefit the special rights and powers of a holder of shares of Class B Common Stock. Holders of shares of Class B Common Stock may at any and all times transfer to any Person the shares of Class A Common Stock issuable upon conversion of such shares of Class B Common Stock. (d) Prior to a Tax-Free Spin-Off, shares of Class B Common Stock shall be transferred on the books of the Corporation and a new certificate therefor issued, upon presentation at the office of the Secretary of the Corporation (or at such additional place or places as may from time to time be designated by the Secretary of the Corporation) of the certificate for such shares, in proper form for transfer and accompanied by all requisite stock transfer tax stamps, only if such certificate when so presented shall also be accompanied by any one of the following: (i) an affidavit from SAIC stating that such certificate is being presented to effect a transfer by SAIC of such shares to a Subsidiary Entity of SAIC; or -9- 11 (ii) an affidavit from SAIC stating that such certificate is being presented to effect a transfer by any Subsidiary Entity of SAIC of such shares to SAIC or another Subsidiary Entity of SAIC; or (iii) an affidavit from SAIC (or the Class B Transferee) stating that such certificate is being presented to effect a transfer by SAIC (or the Class B Transferee) or any of its (or the Class B Transferee's) Subsidiary Entities of such shares to a Class B Transferee or a Subsidiary Entity of the Class B Transferee as contemplated by paragraph (D)(6)(b); or (iv) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by the Class B Transferee of such shares to a Subsidiary Entity of the Class B Transferee; or (v) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by any Subsidiary Entity of the Class B Transferee of such shares to the Class B Transferee or another Subsidiary Entity of the Class B Transferee; or (vi) an affidavit from SAIC stating that such certificate is being presented to effect a transfer by SAIC of such shares to the stockholders of SAIC in connection with a Tax-Free Spin-Off; or (vii) an affidavit from the Class B Transferee stating that such certificate is being presented to effect a transfer by the Class B Transferee of such shares to the stockholders of the Class B Transferee in connection with a Tax-Free Spin-Off. Each affidavit of a record holder furnished pursuant to this paragraph (D)(6)(d) shall be verified as of a date not earlier than five days prior to the date of delivery thereof, and, where such record holder is a corporation or partnership, shall be verified by an officer of the corporation or by a general partner of the partnership, as the case may be. (e) Prior to the occurrence of a Tax-Free Spin-Off, each certificate for shares of Class B Common Stock shall bear a legend on the face thereof reading as follows: "The shares of Class B Common Stock represented by this certificate may not be transferred to any -10- 12 person or entity in connection with a transfer that does not meet the qualifications set forth in paragraph (D)(6)(d) of ARTICLE IV of the Second Amended and Restated Certificate of Incorporation of this Corporation and no person who receives such shares in connection with a transfer which does not meet the qualifications prescribed by paragraph (D)(6)(d) of said ARTICLE IV is entitled to own or to be registered as the record holder of such shares of Class B Common Stock and such shares will have been automatically converted into Class A Common Stock upon any such purported transfer. The record holder of this certificate may at any time convert such shares of Class B Common Stock into the same number of shares of Class A Common Stock. Each holder of this certificate, by accepting the same, accepts and agrees to all of the foregoing." Upon and after the transfer of shares in a Tax-Free Spin-Off, shares of Class B Common Stock shall no longer bear the legend set forth above in this paragraph (D)(6)(e). (f) Upon any conversion of shares of Class B Common Stock into shares of Class A Common Stock pursuant to the provisions of this paragraph (D)(6), any dividend, for which the payment date shall be subsequent to such conversion, which may have been declared on the shares of Class B Common Stock so converted shall be deemed to have been declared, and shall be payable, with respect to the shares of Class A Common Stock into or for which such shares of Class B Common Stock shall have been so converted, and any such dividend payable in Common Stock shall be deemed to have been declared, and shall be payable, in shares of Class A Common Stock. (g) The Corporation shall not reissue or resell any shares of Class B Common Stock which shall have been converted into shares of Class A Common Stock pursuant to or as permitted by the provisions of this paragraph (D)(6), or any shares of Class B Common Stock which shall have been acquired by the Corporation in any other manner. The Corporation shall, from time to time, take such appropriate action as may be necessary to retire such shares and to reduce the authorized amount of Class B Common Stock accordingly. The Corporation shall at all times reserve and keep available, out of its authorized but unissued Common Stock, such number of shares of Class A Common Stock as would become issuable upon the conversion of all shares of Class B Common Stock then outstanding. -11- 13 (h) In connection with any transfer or conversion of any stock of the Corporation pursuant to or as permitted by the provisions of this paragraph (D)(6) or in connection with the making of any determination referred to in this paragraph (D)(6): (1) the Corporation shall be under no obligation to make any investigation of facts unless an officer, employee or agent of the Corporation responsible for making such transfer or determination or issuing Class A Common Stock pursuant to such conversion has substantial reason to believe, or unless the Board of Directors (or a committee of the Board of Directors designated for such purpose) determines that there is substantial reason to believe, that any affidavit or other document is incomplete or incorrect in a material respect or that an investigation would disclose facts upon which any determination referred to in paragraph (D)(6)(f) above should be made, in either of which events the Corporation shall make or cause to be made such investigation as it may deem necessary or desirable in the circumstances and have a reasonable time to complete such investigation; and (2) neither the Corporation nor any director, officer, employee or agent of the Corporation shall be liable in any manner for any action taken or omitted in good faith. (i) The Corporation will not be required to pay any documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of shares of Class A Common Stock on the conversion of shares of Class B Common Stock pursuant to this paragraph (D)(6), and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Corporation the amount of any such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. 7. All rights to vote and all voting power (including, without limitation thereto, the right to elect directors) shall be vested exclusively in the holders of Common Stock, voting together as a single class, except as otherwise expressly provided in this Second Amended and Restated Certificate of Incorporation, in a Preferred Stock Designation or as otherwise expressly required by applicable law. E. Subject to the limitations and in the manner provided by law, shares of the Preferred Stock may be issued from time to time in series, and the Board of Directors of the Corporation or a duly-authorized committee of the Board of Directors of the Corporation, in accordance with the laws of the State of -12- 14 Delaware, is hereby authorized to determine or alter the relative rights, powers (including voting powers), preferences, privileges and restrictions granted to or imposed upon Preferred Stock or any wholly unissued series of shares of Preferred Stock, and to increase or decrease (but not below the number of shares of any series of Preferred Stock then outstanding) the number of shares of any such series subsequent to the issue of shares of that series. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall upon the taking of any action required by applicable law resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. ARTICLE V In accordance with Section 203(b)(3) of the GCL, the Corporation expressly elects not to be governed by Section 203 of the GCL. ARTICLE VI The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by statute or by this Second Amended and Restated Certificate of Incorporation or the bylaws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Election of directors need not be by written ballot unless the bylaws so provide. ARTICLE VII The books and records of the Corporation may be kept (subject to any mandatory requirement of law) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or by the bylaws of the Corporation. ARTICLE VIII In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power without the assent or vote of the stockholders to make, alter, amend, change, add to or repeal the bylaws of the Corporation. -13- 15 ARTICLE IX A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the Corporation and its stockholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (c) under Section 174 of the GCL; or (d) for any transaction from which the director derived an improper personal benefit. If the GCL hereafter is amended to further eliminate or limit the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended GCL. Any repeal or modification of the foregoing provisions of this Article IX shall not adversely affect any right or protection of any director, officer, employee or agent of the Corporation existing at the time of such repeal or modification. ARTICLE X A. In anticipation that the Corporation will cease to be a wholly owned subsidiary of SAIC, but that SAIC will remain a stockholder of the Corporation, and in anticipation that the Corporation and SAIC may engage in the same or similar activities or lines of business and have an interest in the same areas of corporate opportunities, and in recognition of (i) the benefits to be derived by the Corporation through its continued contractual, corporate and business relations with SAIC (including service of officers and directors of SAIC as officers and directors of the Corporation) and (ii) the difficulties attendant to any director, who desires and endeavors to fully satisfy such director's fiduciary duties, in determining the full scope of such duties in any particular situation, the provisions of this Article X are set forth to regulate, define and guide the conduct of certain affairs of the Corporation as they may involve SAIC and its officers and directors, and the powers, rights, duties and liabilities of the Corporation or its officers, directors and stockholders in connection therewith. B. Except as the Corporation and SAIC may otherwise agree in writing: (a) SAIC shall not have a duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as the Corporation, and (b) neither SAIC nor any officer or director thereof shall be presumed liable to the Corporation or its stockholders for breach of any fiduciary duty by reason of any such activities of SAIC or of such person's participation therein. -14- 16 In the event that SAIC acquires knowledge of a potential transaction or matter that may be a corporate opportunity for both SAIC and the Corporation, SAIC (and its officers and directors) shall be entitled to offer such corporate opportunities to the Corporation or SAIC as SAIC deems appropriate under the circumstances in its sole discretion and shall not be presumed liable to the Corporation or its stockholders for breach of any fiduciary duty as a stockholder of the Corporation or controlling person of a stockholder by reason of the fact that SAIC pursues or acquires such corporate opportunity for itself, directs such corporate opportunity to another person or entity, or does not communicate information regarding, or offer, such corporate opportunity to the Corporation. C. In the event that a director, officer or employee of the Corporation who is also a director, officer or employee of SAIC acquires knowledge of a potential transaction or matter that may be a corporate opportunity for the Corporation and SAIC (whether such potential transaction or matter is proposed by a third-party or is conceived of by such director, officer or employee of the Corporation), such director, officer or employee shall be entitled to offer such corporate opportunity to the Corporation or SAIC as such director, officer or employee deems appropriate under the circumstances in his or her sole discretion, and no such director, officer or employee shall be presumed liable to the Corporation or its stockholders thereof for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or the derivation of any improper personal benefit by reason of the fact that (i) such director, officer or employee offered such corporate opportunity to SAIC rather than the Corporation or did not communicate information regarding such corporate opportunity to the Corporation or (ii) SAIC pursues or acquires such corporate opportunity for itself or directs such corporate opportunity to another person or does not communicate information regarding such corporate opportunity to the Corporation. D. Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this ARTICLE X. E. For purposes of this ARTICLE X and ARTICLE XI only, the term "Corporation" shall mean the Corporation and all corporations, partnerships, joint ventures, associations and other entities in which the Corporation Beneficially Owns (as defined in ARTICLE IV, Section (D)(6)(b) above) (directly or indirectly) 50% or more of the outstanding Voting Interests (as defined in Article IV, Section (D)(6)(b) above). F. Notwithstanding anything in this Second Amended and Restated Certificate of Incorporation to the contrary, the -15- 17 foregoing provisions of this ARTICLE X shall expire on the date that SAIC ceases to Beneficially Own (as defined in Article IV, Section (D)(6)(b) above) (directly or indirectly) Common Stock representing at least 20% of the number of outstanding shares of Common Stock of the Corporation and no person who is a director or officer of the Corporation is also a director or officer of SAIC. Neither the alteration, amendment, change or repeal of any provision of this ARTICLE X nor the adoption of any provision of this Second Amended and Restated Certificate of Incorporation inconsistent with any provision of this ARTICLE X shall eliminate or reduce the effect of this ARTICLE X in respect of any matter occurring, or any cause of action, suit or claim that, but for this ARTICLE X, would accrue or arise, prior to such alteration, amendment, repeal or adoption. G. The provisions of this ARTICLE X are in addition to the provisions of ARTICLE XI. ARTICLE XI A. No contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) between the Corporation and SAIC or any Related Entity (as defined below) or between the Corporation and one or more of the directors or officers of the Corporation, SAIC or any Related Entity, shall be void or voidable solely for the reason that SAIC, a Related Entity or any one or more of the officers or directors of the Corporation, SAIC or any Related Entity are parties thereto, or solely because any such directors or officers are present at or participate in the meeting of the Board of Directors or committee thereof which authorizes the contract, agreement, arrangement, transaction, amendment, modification or termination or solely because his, her or their votes are counted for such purpose, but any such contract, agreement, arrangement or transaction (or any amendment, modification or termination thereof) shall be governed by the provisions of this Second Amended and Restated Certificate of Incorporation, the Corporation's bylaws, the GCL, written agreement between the Corporation and SAIC and other applicable law. For purposes of this ARTICLE XI, (i) the term "Related Entity" means a corporation, partnership, joint venture, association or other organization in which one or more of the directors of the Corporation has or have a direct or indirect financial interest and (ii) the terms the "Corporation" and "SAIC" have the meanings set forth in ARTICLE X, Section (E). B. Directors of the Corporation who are also directors or officers of SAIC or of any Related Entity may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee that authorizes or approves any such contract, agreement, arrangement or transaction (or amendment, modification or termination thereof). Outstanding shares of Common Stock owned by SAIC and any Related Entity may -16- 18 be counted in determining the presence of a quorum at a meeting of stockholders that authorizes or approves any such contract, agreement, arrangement or transaction (or amendment, modification or termination thereof). C. Neither SAIC nor any officer or director thereof or of any Related Entity shall be presumed liable to the Corporation or its stockholders for breach of any fiduciary duty or duty of loyalty or failure to act in (or not opposed to) the best interests of the Corporation or the derivation of any improper personal benefit by reason of the fact that SAIC or an officer or director thereof or of such Related Entity in good faith takes any action or exercises any rights or gives or withholds any consent in connection with any agreement or contract between SAIC or such Related Entity and the Corporation. No vote cast or other action taken by any person who is an officer, director or other representative of SAIC or such Related Entity, which vote is cast or action is taken by such person in his or her capacity as a director of this Corporation, shall constitute an action of or the exercise of a right by or a consent of SAIC or such Related Entity for the purpose of any such agreement or contract. D. Any person or entity purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this ARTICLE XI. E. For purposes of this ARTICLE XI, any contract, agreement, arrangement or transaction with any corporation, partnership, joint venture, association or other entity in which the Corporation Beneficially Owns (as defined in ARTICLE IV, Section (D)(6)(b) above) (directly or indirectly) 50% or more of the outstanding Voting Interests (as defined in Article IV, Section (D)(6)(b) above), or with any officer or director thereto, shall be deemed to be a contract, agreement, arrangement or transaction with the Corporation. F. Neither the alteration, amendment, change or repeal of any provision of this ARTICLE XI nor the adoption of any provision inconsistent with any provision of this ARTICLE XI shall eliminate or reduce the effect of this ARTICLE XI in respect of any matter occurring, or any cause of action, suit or claim that, but for this ARTICLE XI, would accrue or arise, prior to such alteration, amendment, change, repeal or adoption. G. The provisions of this ARTICLE XI are in addition to the provisions of ARTICLE X. -17- 19 ARTICLE XII The Corporation reserves the right to amend or repeal any provision contained in this Second Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. -18- EX-3.II 3 BYLAWS 1 EXHIBIT 3(ii) AMENDED AND RESTATED B Y - L A W S OF NETWORK SOLUTIONS, INC. (a Delaware corporation) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1 Offices . . . . . . . . . . . . . . . . . . . . . 1 1.1 Principal Office . . . . . . . . . . . . . . . . . 1 1.2 Additional Offices . . . . . . . . . . . . . . . . 1 ARTICLE 2 Meeting of Stockholders . . . . . . . . . . . . . 1 2.1 Place of Meeting . . . . . . . . . . . . . . . . . 1 2.2 Annual Meeting . . . . . . . . . . . . . . . . . . 1 2.3 Special Meetings . . . . . . . . . . . . . . . . . 2 2.4 Notice of Meetings . . . . . . . . . . . . . . . . 2 2.5 Business Matter of a Special Meeting . . . . . . . 3 2.6 List of Stockholders . . . . . . . . . . . . . . . 3 2.7 Organization and Conduct of Business . . . . . . . 3 2.8 Quorum and Adjournments . . . . . . . . . . . . . 3 2.9 Voting Rights . . . . . . . . . . . . . . . . . . 4 2.10 Majority Vote . . . . . . . . . . . . . . . . . . 4 2.11 Record Date for Stockholder Notice and Voting . . 4 2.12 Proxies . . . . . . . . . . . . . . . . . . . . . 4 2.13 Inspectors of Election . . . . . . . . . . . . . . 5 2.14 Action Without Meeting . . . . . . . . . . . . . . 5 ARTICLE 3 Directors . . . . . . . . . . . . . . . . . . . . 5 3.1 Number; Qualifications . . . . . . . . . . . . . . 5 3.2 Resignation and Vacancies . . . . . . . . . . . . 5 3.3 Removal of Directors . . . . . . . . . . . . . . . 6 3.4 Powers . . . . . . . . . . . . . . . . . . . . . . 6 3.5 Place of Meetings . . . . . . . . . . . . . . . . 7 3.6 Annual Meetings . . . . . . . . . . . . . . . . . 7 3.7 Regular Meetings . . . . . . . . . . . . . . . . . 7 3.8 Special Meetings . . . . . . . . . . . . . . . . . 7 3.9 Quorum and Adjournments . . . . . . . . . . . . . 7 3.10 Action Without Meeting . . . . . . . . . . . . . . 8 3.11 Telephone Meetings . . . . . . . . . . . . . . . . 8 3.12 Waiver of Notice . . . . . . . . . . . . . . . . . 8 3.13 Fees and Compensation of Directors . . . . . . . . 8 3.14 Rights of Inspection . . . . . . . . . . . . . . . 9 3.15 Nominating Procedures . . . . . . . . . . . . . . 9 ARTICLE 4 Committees of Directors . . . . . . . . . . . . . 9 4.1 Selection . . . . . . . . . . . . . . . . . . . . 9 4.2 Power . . . . . . . . . . . . . . . . . . . . . . 10 4.3 Committee Minutes . . . . . . . . . . . . . . . . 10 ARTICLE 5 Officers . . . . . . . . . . . . . . . . . . . . . 10 5.1 fficers Designated . . . . . . . . . . . . . . . . 10 5.2 Appointment of Officers . . . . . . . . . . . . . 11 5.3 Subordinate Officers . . . . . . . . . . . . . . . 11 5.4 Removal and Resignation of Officers . . . . . . . 11 5.5 Vacancies in Offices . . . . . . . . . . . . . . . 11 5.6 Compensation . . . . . . . . . . . . . . . . . . . 11 5.7 The Chairman of the Board . . . . . . . . . . . . 11
-i- 3 5.8 The President . . . . . . . . . . . . . . . . . . 11 5.9 The Vice President . . . . . . . . . . . . . . . . 12 5.10 The Secretary . . . . . . . . . . . . . . . . . . 12 5.11 The Assistant Secretary . . . . . . . . . . . . . 12 5.12 The Treasurer . . . . . . . . . . . . . . . . . . 12 5.13 The Assistant Treasurer . . . . . . . . . . . . . 13 ARTICLE 6 Stock Certificates . . . . . . . . . . . . . . . . 13 6.1 Certificates for Shares . . . . . . . . . . . . . 13 6.2 Signatures on Certificates . . . . . . . . . . . . 13 6.3 Transfer of Stock . . . . . . . . . . . . . . . . 14 6.4 Registered Stockholders . . . . . . . . . . . . . 14 6.5 Record Date . . . . . . . . . . . . . . . . . . . 14 6.6 Lost, Stolen or Destroyed Certificates . . . . . . 14 ARTICLE 7 Notices . . . . . . . . . . . . . . . . . . . . . 15 7.1 Notice . . . . . . . . . . . . . . . . . . . . . . 15 7.2 Waiver . . . . . . . . . . . . . . . . . . . . . . 15 ARTICLE 8 General Provisions . . . . . . . . . . . . . . . . 15 8.1 Dividends . . . . . . . . . . . . . . . . . . . . 15 8.2 Dividend Reserve . . . . . . . . . . . . . . . . . 15 8.3 Checks . . . . . . . . . . . . . . . . . . . . . . 15 8.4 Fiscal Year . . . . . . . . . . . . . . . . . . . 15 8.5 Corporate Seal . . . . . . . . . . . . . . . . . . 16 8.6 Execution of Corporate Contracts and Instruments . 16 ARTICLE 9 Amendments . . . . . . . . . . . . . . . . . . . . 16
-ii- 4 EXHIBIT 3(ii) B Y-L A W S OF NETWORK SOLUTIONS, INC. (a Delaware corporation) ARTICLE 1 Offices 1.1 Principal Office. The principal executive office of the Corporation shall be 9 East Loockerman Square, City of Dover, County of Kent, Dover, Delaware 19901, and the name of the registered agent in charge thereof is National Corporate Research, Ltd. 1.2 Additional Offices. The Corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time designate or the business of the Corporation may require. ARTICLE 2 Meeting of Stockholders 2.1 Place of Meeting. All meetings of the stockholders for the election of directors shall be held at the principal office of the Corporation, at such place as may be fixed from time to time by the Board or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board and stated in the notice of the meeting. Meetings of stockholders for any purpose may be held at such time and place within or without the State of Delaware as the Board may fix from time to time and as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. 2.2 Annual Meeting. Annual meetings of stockholders shall be held each year at such date and time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such annual meetings, the stockholders shall elect a Board and transact such other business as may properly be brought before the meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board, otherwise properly brought before the meeting by or at -1- 5 the direction of the Board, or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than fifty (50) days nor more than seventy-five (75) days prior to the meeting; provided, however, that in the event that less than sixty-five (65) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business. Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.2 by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. The chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.3 Special Meetings. Special meetings of the stockholders, for any purpose or purposes, may, unless otherwise prescribed by statute or by the Certificate of Incorporation, be called only by the Chairman of the Board, the President, or the Board. 2.4 Notice of Meetings. Written notice of stockholders' meetings, stating the place, date and time of the meeting and the purpose or purposes for which the meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the -2- 6 place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. 2.5 Business Matter of a Special Meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. 2.6 List of Stockholders. The officer in charge of the stock ledger of the Corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting, shall be specified in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 2.7 Organization and Conduct of Business. The Chairman of the Board or, in his or her absence, the President of the Corporation or, in their absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 2.8 Quorum and Adjournments. Except where otherwise provided by law or the Certificate of Incorporation or these By-Laws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of -3- 7 enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 2.9 Voting Rights. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 2.10 Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation or of these By-Laws, a different vote is required in which case such express provision shall govern and control the decision of such question. 2.11 Record Date for Stockholder Notice and Voting. For purposes of determining the stockholders entitled to notice of any meeting or to vote, or entitled to receive payment of any dividend or other distribution, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any other action. If the Board does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. 2.12 Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stock- -4- 8 holder or the stockholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven months from the date of the proxy, unless otherwise provided in the proxy. 2.13 Inspectors of Election. Before any meeting of stockholders the Board may appoint any person other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any stockholder or a stockholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any stockholder or a stockholder's proxy shall, appoint a person to fill that vacancy. 2.14 Action Without Meeting. Any action required to be taken at any annual or special meeting of stockholders, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 3 Directors 3.1 Number; Qualifications. The Board shall consist of one or more members, the number thereof to be determined from time to time by resolution of the Board. The directors shall be elected at the annual meeting of the stockholders or at any special meeting of stockholders, except as provided in Section 3.2, and each director so elected shall hold office until his -5- 9 successor is elected and qualified or until his earlier resignation or removal. Directors need not be stockholders. 3.2 Resignation and Vacancies. A vacancy or vacancies in the Board shall be deemed to exist in the case of the death, resignation or removal of any director, or if the authorized number of directors be increased. Vacancies may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, unless otherwise provided in the Certificate of Incorporation. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If the Board accepts the resignation of a director tendered to take effect at a future time, the Board shall have power to elect a successor to take office when the resignation is to become effective. If there are no directors in office, then an election of directors may be held in the manner provided by statute. 3.3 Removal of Directors. Unless otherwise restricted by statute, the Certificate of Incorporation or these By-Laws, any director or the entire Board may be removed, with or without cause, by the holders of at least a majority of the shares entitled to vote at an election of directors. 3.4 Powers. The business of the Corporation shall be managed by or under the direction of the Board which may exercise all such powers of the Corporation and do all such lawful acts and things which are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: (a) Select and remove all officers, agents, and employees of the Corporation; prescribe any powers and duties for them that are consistent with law, with the Certificate of Incorporation, and with these By-Laws; fix their compensation; and require from them security for faithful service; (b) Confer upon any office the power to appoint, remove and suspend subordinate officers, employees and agents; (c) Change the principal executive office or the principal business office in the State of California or any other state from one location to another; cause the Corporation to be qualified to do business in any other state, territory, dependency or country and conduct business within or without the State of Virginia; and designate any place within or without the State of Virginia for the holding of any stock- -6- 10 holders meeting, or meetings, including annual meetings; (d) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates; (e) Authorize the issuance of shares of stock of the Corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, tangible or intangible property actually received; (f) Borrow money and incur indebtedness on behalf of the Corporation, and cause to be executed and delivered for the Corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations and other evidences of debt and securities; (g) Declare dividends from time to time in accordance with law; (h) Adopt from time to time such stock option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (i) Adopt from time to time regulations not inconsistent with these By-Laws for the management of the Corporation's business and affairs. 3.5 Place of Meetings. The Board may hold meetings, both regular and special, either within or without the State of Delaware. 3.6 Annual Meetings. The annual meetings of the Board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. The annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 3.7 Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined from time to time by the Board. 3.8 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the President, a Vice President or a majority of the Board. Four (4) hours' notice to each director, either personally or by telegram, cable, facsimile, commercial delivery service, telex or similar means sent to such director's business or home address, or two (2) -7- 11 day's notice by written notice deposited in the mail or delivered by a nationally recognized courier service, shall be given to each director by the Secretary or by the person calling the meeting. 3.9 Quorum and Adjournments. At all meetings of the Board, a majority of the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise be specifically provided by law or the Certificate of Incorporation. If a quorum is not present at any meeting of the Board, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 3.10 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.11 Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any member of the Board or any committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.12 Waiver of Notice. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 3.13 Fees and Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing -8- 12 committees may be allowed like compensation for attending committee meetings. 3.14 Rights of Inspection. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation and also of its subsidiary corporations, domestic or foreign. Such inspection by a director may be made in person or by agent or attorney and includes the right to copy and obtain extracts. 3.15 Nominating Procedures. Subject to the rights of holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for election to the Board of Directors of the Corporation at a meeting of stockholders may be made on behalf of the board by the nominating committee appointed by the Board, or by any stockholder of the Corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by the nominating committee on behalf of the board, shall be made by notice in writing delivered or mailed by first-class United States mail or a nationally recognized courier service, postage prepaid, to the Secretary or Assistant Secretary of the Corporation, and received by him not less than one hundred twenty (120) days prior to any meeting of stockholders called for the election of directors; provided, however, that if less than one hundred (100) days' notice of the meeting is given to stockholders, such nomination shall have been mailed or delivered to the Secretary or the Assistant Secretary of the Corporation not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. Such notice shall set forth as to each proposed nominee who is not an incumbent director (i) the name, age, business address and, if known, residence address of each nominee proposed in such notice, (ii) the principal occupation or employment of each such nominee, (iii) the number of shares of stock of the Corporation which are beneficially owned by each such nominee and by the nominating stockholder, and (iv) any other information concerning the nominee that must be disclosed of nominees in proxy solicitations regulated by Regulation 14A of the Securities Exchange Act of 1934. The chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if the chairman should so determine, the chairman shall so declare to the meeting and the defective nomination shall be disregarded. ARTICLE 4 Committees of Directors 4.1 Selection. The Board may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the -9- 13 Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 4.2 Power. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of dissolution, removing or indemnifying directors or amending the By-Laws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. 4.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. ARTICLE 5 Officers 5.1 Officers Designated. The officers of the Corporation shall be chosen by the Board and shall be a President, a Secretary and a Treasurer. The Board may also choose a Chairman of the Board, one or more Vice Presidents, and one or more assistant Secretaries and assistant Treasurers. Any number of -10- 14 offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. 5.2 Appointment of Officers. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or 5.5 of this Article 5, shall be appointed by the Board, and each shall serve at the pleasure of the Board, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. The Board may appoint, and may empower the President to appoint, such other officers and agents as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the By-Laws or as the Board may from time to time determine. 5.4 Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office. 5.6 Compensation. The salaries of all officers of the Corporation shall be fixed from time to time by the Board and no officer shall be prevented from receiving a salary because he is also a director of the Corporation. 5.7 The Chairman of the Board. The Chairman of the Board, if such an officer be elected, shall, if present, perform such other powers and duties as may be assigned to him from time to time by the Board. If there is no President, the Chairman of the Board shall also be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 5.8 of this Article 5. 5.8 The President. Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, -11- 15 if there be such an officer, the President shall be the Chief Executive Officer of the Corporation, shall preside at all meetings of the stockholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. He or she shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Corporation. 5.9 The Vice President. The Vice President (or in the event there be more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, the President, the Chairman of the Board or these By-Laws. 5.10 The Secretary. The Secretary shall attend all meetings of the Board and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the Chairman of the Board or the President, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the Corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the Corporation and to attest the affixing thereof by his or her signature. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. 5.11 The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order designated by the Board (or in the absence of any designa- -12- 16 tion, in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.12 The Treasurer. The Treasurer shall have the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as Treasurer and of the financial condition of the Corporation. 5.13 The Assistant Treasurer. The Assistant Treasurer, or if there shall be more than one, the Assistant Treasurers in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Treasurer or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Treasurer and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. ARTICLE 6 Stock Certificates 6.1 Certificates for Shares. The shares of the Corporation shall be represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the Corporation by, the Chairman of the Board, or the President or a Vice President and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation. Within a reasonable time after the issuance or transfer of uncertified stock, the Corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 6.2 Signatures on Certificates. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile -13- 17 signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.3 Transfer of Stock. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated share, such uncertificated shares shall be cancelled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the Corporation. 6.4 Registered Stockholders. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a percent registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.5 Record Date. In order that the Corporation may determine the stockholders of record who are entitled to receive notice of, or to vote at, any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any lawful action, the Board may fix, in advance, a record date which shall not be more than sixty (60) nor less than ten (10) days prior to the date of such meeting, nor more than sixty (60) days prior to the date of any other action. A determination of stockholders of record entitled to notice or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. 6.6 Lost, Stolen or Destroyed Certificates. The Board may direct that a new certificate or certificates be issued to replace any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing the issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or -14- 18 her legal representative, to advertise the same in such manner as it shall require, and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. ARTICLE 7 Notices 7.1 Notice. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, notice is required to be given to any director or stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram or telephone. 7.2 Waiver. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE 8 General Provisions 8.1 Dividends. Dividends upon the capital stock of the Corporation, subject to any restrictions contained in the General Corporation Laws of Delaware or the provisions of the Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. 8.2 Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Checks. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or -15- 19 such other person or persons as the Board may from time to time designate. 8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. 8.5 Corporate Seal. The Board may provide a suitable seal, containing the name of the Corporation, which seal shall be in charge of the Secretary. If and when so directed by the Board or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. 8.6 Execution of Corporate Contracts and Instruments. The Board, except as otherwise provided in these By-Laws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. ARTICLE 9 Amendments The Board of Directors is expressly empowered to adopt, amend or repeal By-Laws of the Corporation, provided, however, that any adoption, amendment or repeal of By-Laws of the Corporation by the board of directors shall require the approval of at least sixty-six and two-thirds percent of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the board). The stockholders shall also have power to adopt, amend or repeal By-Laws of the Corporation, provided, however, that in addition to any vote of the holders of any class or series of stock of this Corporation required by law or by the Certificate of Incorporation of the Corporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent of the voting power of all of the then outstanding shares of the stock of the Corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provisions of the By-Laws of the Corporation. -16- 20 CERTIFICATE OF SECRETARY I, the undersigned, hereby certify: 1. That I am the duly elected, acting and qualified Secretary of NSI Merger Corporation, a Delaware corporation; and 2. That the foregoing Amended and Restated By-Laws, comprising sixteen (16) pages, constitute the By-Laws of such Corporation as duly adopted at a meeting of the Board of Directors of such Corporation held on September 18, 1996 and reflected in the minutes thereof. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation this 18th day of September, 1996. /s/ Aloma H. Avery -------------------------- Secretary Aloma H. Park EX-10.1 4 COOPERATIVE AGREEMENT 1 EXHIBIT 10.1 NSF Cooperative Agreement No. NCR-9218742 Network Information Services Manager(s) for NSFNET and the NREN: INTERNIC Registration Services COOPERATIVE AGREEMENT NO. NCR-9218742 Parties: National Science Foundation 1800 G Street, N.W. Washington, D.C. 20550 and Network Solutions, Incorporated 505 Huntmar Park Drive Herndon, VA 20170 COOPERATIVE AGREEMENT NO. NCR-9218742 Parties: National Science Foundation and Network Solutions, Incorporated Title: Network Information Services Manager(s) for NSFNET and the NREN: INTERNIC Registration Services Type of Award: Cost-Plus-Fixed-Fee Cooperative Agreement Estimated Total Amount: $4,219,339 Effective Date: January 1, 1993 Expiration Date: September 30, 1998 2 Authority: This agreement is awarded under the authority of the National Science Foundation Act (R@ U.S.C. 186 et seq.) and the Federal Grant and Cooperative Agreement Act (31 U.S.C. 6301 et seq.) This agreement is entered into between the United States of America, Hereinafter called the Government, represented by the National Science Foundation, hereinafter called the Foundation or NSF, and Network Solutions, Incorporated, hereinafter called the A wardee. NSF Program Official: Donald R. Mitchell Telephone : 202-357-9717 e-mail: dmitchelf@nsf.gov NSF Administrative Official: Altie H. Metcalf Telephone: 202-357-9843 e-mail: ametcalf@nsf.gov IN WITNESS WHEREOF, the parties have executed Cooperative Agreement No. NCR-9218742, Network Information Services Manager(s) for NSFNET and the NREN: INTERNIC Registration Services. UNITED STATES OF AMERICA ACCEPTANCE Aaron R. Asrael Roger L.Evans Grants and Contracts Chief Financial Officer (Date) (Date) NATIONAL SCIENCE FOUNDATION Network Solutions, Incorporated Washington, D.C. 20550 Herndon, VA 22070 - ------------------------------------------------------------------------ INDEX TO COOPERATIVE AGREEMENT NCR-9218742 I. SPECIAL CONDITIONS ARTICLE -1. Background and Purpose of Agreement -2. Special Requirements -3. Statement of Work -4. Turnaround and Performance Measures -5. Estimated Requirements and Review -6. Responsibilities -7. Period of Performance -8. Funding -9. Annual Report, Program Plan, and Budget -10. Other Reporting Requirements -11. Directed Activities -12. Key Personnel -13. Order of Precedence -14. Publicity, Public Information and Publications -15. Project Income from Registration Fees 3 II. GENERAL CONDITIONS Grant General Conditions - GC-1 (10/91) Cooperative Agreement General Conditions - CA-1 (12/91) ARTICLE 1. BACKGROUND AND PURPOSE OF AGREEMENT During the past two decades computer networks have facilitated collaboration among members of many research and education communities and provided them with remote access to information and computing resources. These networks have continued to grow both in the number of users connected and in the capabilities provided to the individual users. It is anticipated that such networks will become essential to research and education during this decade. In particular, the collection of interconnected networks known as the Internet has become important for many research communities. It is also of increasing importance for education. Today more than 5,000 networks comprise the Internet. These networks link together hundreds of thousands of computers and millions of users throughout the world. The domestic, non-military portion of the Internet includes NSFNET. It also includes other federally sponsored networks such as NASA Science Internet (NSI) and Energy Sciences Network (Esnet). NSFNET, NSI, and Esnet, as well as some other networks of the Internet, are related to the National Research and Education Network (NREN) which was defined in the President's Fiscal 1992 budget and which has been authorized by the passage in December, 1991, of the High Performance Computing and Communications Act, Public Law 102-194. The NREN is projected to evolve from a part of the Internet containing portions of NSFNET, NSI, and Esnet. This evolution will reflect the legal and technical requirements of the various sponsoring agencies. For example, NASA and DOE are mission agencies whose networksi traffic must relate to the agenciesi missions. NSF, on the other hand, is chartered to support science and engineering research and education; hence NSFNET can carry all traffic contemplated for the NREN and may in fact support additional traffic as well. Because of the breadth of the charter of the NSFNET, it is projected that it will continue to serve an expanding base of research and education users. The provision of enhanced network information services for NSFNET will be an important part of the expansion in user base. In cooperation with the Internet community, the National Science Foundation developed and released, in the spring of 1992, Project Solicitation NSF92-24 for one or more Network Information Services Managers (NIS Manager(s)) to provide and/or coordinate (i) Registration Services, (ii) Director and Database Services, and (iii) Information Services for the NSFNET. As a result of this solicitation, three separate organizations were selected to receive cooperative agreements in the areas of (i) Registration Services, (ii) Directory and Database Services, and (iii) Information Services. Together, these three awards constitute the NIS Manager(s) Project. It is essential that the three project participants selected work closely together to provide a seamless interface for users in need of services. For this reason, the three awardees, at the request of the Foundation, have developed a detailed concept and plan to provide this seamless interface called the "INTERNIC," have revised their proposals to reflect the implementation of the "INTERNIC" concept, and have agreed to the structuring of their three (separate) awards as one collaborative project. This Cooperative Agreement for Registration Services is one of the three (3) collaborative awards resulting from the NIC Manager(s) Project solicitation. 4 It is anticipated that all registration services required during the period of this Agreement will be obtained and furnished under the terms of this Agreement and that the definition and providing of these services will help facilitate the evolution of the NSFNET and the development of the NREN. References to NSFNET in this Agreement should in general be understood to include the NREN as well. ARTICLE 2. SPECIAL REQUIREMENTS A. Collaborative Proposals and Effort(s) 1. An important aspect of the Awardee's work is coordination with the Network Information Services Managers for (i) Database and Directory Services (AT&T under Cooperative Agreement NCR-9218179) and (ii) Information Services (General Atomics under Coop erative Agreement NCR-9218749) to provide a "seamless interface" for internet users in accordance with the "INTERNIC" concept explicated in the Awardee's revised proposal dated October 19, 1992. Hereafter in this agreement, Awardee's two collaborating pa rtners, General Atomics and AT&T, shall be referred to as Collaborators and Awardee shall coordinate its performance hereunder with the efforts of its Collaborators in accordance with the "INTERNIC" concept explicated in the Awardee's revised proposal dat ed October 19,1992. The NSF Program Official reserves the authority to resolve technical, managerial, or scheduling disputes. 2. This requirement for close collaboration and coordination among the three aspects of the Network Information Services Management Project shall be stated in each of the three awards. Such collateral agreements and fund transfers consistent with the cu rrently approved Program Plan (see Article9) as may be necessary to effect the coordination, collaboration and seamless interface to users called for by the "INTERNIC" concept or improve the overall integration of the NIS Manager(s) Project may be entered into by, between and among the Awardee and its Collaborators without further Foundation approvals. Absent a specific inclusion in the approved Program Plan, Awardee fund transfers made pursuant to this Article may not exceed $50,000 in any Program Year. B. Directed Activities At the request of the NSF Program Director, as set forth in article 13 (below), the Awardee shall attend such meetings, seminars, conference and planning and other events and shall provide such related supplies and services as necessary to promulgate info rmation regarding registration activity to the worldwide internet community and to facilitate the most effective, efficient and ubiquitous registration services possible. ARTICLE 3. STATEMENT OF WORK A. The Awardee shall provide to non-military internet users and networks all necessary registration services (which were) previously provided by the Defense Information Systems Agency Network Information Center(the DISA NIC). B. The work will be performed in general accordance with NSF Project Solicitation NSF 92-24 for Network Information Services Manager(s) for the NSFNET and the NREN, the Awardee's proposal No. NCR-9218742, dated September 23,1992, amended by Awardee's sup plemental proposal addressing collaborative INTERNIC activity, dated October 19, 1992, hereinafter referred to cumulatively as Awardee's Proposal, and in conformance with the technical and/or performance requirements contained therein and set forth below. 5 C. The Awardee shall provide registration services in accordance with the provisions of RFC 1174. As stated in RFC 1174: [T]he Internet system has employed a central Internal Assigned Numbers Authority (IANA) for the allocation and assignment of various numeric identifiers needed for the operation of the Internet. The IANA function is currently performed by the Universit y of Southern California's Information Sciences Institute. The IANA has the discretionary authority to delegate portions of this responsibility and, with respect to numeric network and autonomous system identifiers, has lodged this responsibility with an Internet Registry (IR). D. Moreover, in cooperation with the IANA, the IR may create delegate registries to carry out registration services for specified domains. E. The Awardee shall work with the DISA NIC to design and implement a transition plan, as outlined in Awardee's Proposal, that will minimize inconvenience to the networking community during and after the transition. F. The Non-military internet registration services to be provided under this agreement will initially include, but not be limited to, the following: 1. Domain name registration 2. Domain name server registration 3. Network number assignment 4. Autonomous system number assignment G. Possible future changes in the registration services provided under this Agreement may include, but shall not be limited to, the use of alternate registration/numbering systems or schemes and the imposition of a user based fee structure. However, in no case shall any user based fee structure be imposed or changed without the express direction/approval of the NSF Program Official. ARTICLE 4. TURNAROUND AND PERFORMANACE MEASURES A. The following describes the required turnaround and availability of Registration data: 1. 3 working days/Class C 2. 5 working days/Class B 3. 22 working days/Class A B. Turnaround is the time from receipt of a completed template, and any information pertaining to network topology and usage of previously assigned address space as may be specifically requested in individual cases, to the assignment of a number. Availa bility is the provision of the registration data to the INTERNIC Database and Directory Services Awardee. C. The quality of Awardee's registration services will be measured in accordance with the formulae contained in Section J of Awardee's revised proposal of September 23, 1992 and in light of the turnaround times specified above. 6 ARTICLE 5. ESTIMATED REQUIREMENTS AND REVIEW A. Estimated Requirements The registration services currently required for the performance of this Cooperative Agreement are described above. The registration services described above are only an estimate of the immediate and long-term requirements of the scientific research an d education community and are furnished for planning purposes only. Since the future needs of the scientific research and education community are unknown at this time, the Foundation reserves the right to increase, decrease or modify the quantity, qualit y, content or nature of the registration services to be provided hereunder. Should the Foundation exercise the right to increase, decrease or modify the quantity, quality, content or nature of the registration services provided hereunder, appropriate cha nge to estimated costs, fees, and funding schedules for shall be negotiated and incorporated into the Agreement. B. Performance Review By December 31, 1994, the Foundation will review the project to determine whether to continue funding and to provide general direction as to the continuation and contemplated level of future support to be provided for the remainder of the agreement. ARTICLE 6. RESPONSIBILITIES A. Awardee The Awardee has primary responsibility for ensuring the quality, timeliness and effective management of the registration services provided under this agreement. To the extent that NSF does not reserve specific responsibility for accomplishing the purpo ses of this Agreement, by either special condition or general condition of the Agreement, all such responsibilities remain with the Awardee. B. National Science Foundation 1. General NSF has responsibility for registration services support, support planning, oversight, monitoring, and evaluation. NSF will make approvals required under the General Conditions and, where necessary and appropriate, NSF will contact and negotiate with Federal agencies and other national and International members of the Internet community to further the efforts of this project. 2. Technical a. Program Officer Authority Performance of work under this Cooperative Agreement shall be subject to the general oversight and monitoring of the NSF Program Officer. This involvement may include, but is not limited to: (1) Review of the Quarterly and Annual Reports, Program Plans and Budget. (2) Participation in resolution of technical, managerial and scheduling concerns; review and, where required by the Agreement, approval of technical reports and information to be delivered by Awardee. 7 b. Limitations NSF technical involvement will be consistent with the general statement of work as stated in this Agreement. The Program Officer does not have the authority to and may not: (1) request additional work outside the Statement of Work; (2) issue instructions which constitute a change as defined in Article 8 of GC-1(10/91); (3) require an increase in the Agreement's estimated cost or extension to the Agreement's period of performance, or; (4) change any of the expressed terms, conditions or specifications of the Agreement. c. Awardee Notifications If, in the opinion of the Awardee, any instructions or requests issued by the Program Officer are within one of the categories as defined in (1) through (4) in the above paragraph, the Awardee shall not proceed but shall notify the NSF Grants and Contr acts Officer and shall request, if appropriate, amendment of the Agreement in accordance with Article 37, "Changes -- Limitations of Funds," of the Attached Cooperative Agreement General Conditions. 3. Approvals Unless stated otherwise, all NSF approvals, authorizations, notifications and instructions required pursuant to the terms of this agreement must be set forth in writing by the NSF Grants and Contracts Officer. ARTICLE 7. PERIOD OF PERFORMANCE This Agreement, effective January 1, 1993, shall include a three month phase-in period, a five (5) year period of operational support (commencing April 1, 1993), and a six month (no additional cost) flexibility period and shall continue through September 30, 1998. ARTICLE 8. FUNDING A. Agreement Amount The current total estimated amount of this Cooperative Agreement, exclusive of such amounts as may be provided in connection with Directed Activities provided pursuant to Article 11 (below) is $5,219,339 of which [Proprietary Figures Omitted] B. Allotted Amount(s) 1. There is currently allotted and available for expenditure for provision of registration services under this agreement, exclusive of amounts allotted for Directed Activities(as shown in paragraph 3, below), $1,162,245, of which [Proprietary Figures Omitted] 2. Amounts anticipated to be needed for reimbursement of costs incurred in connection with Directed Activities as provided pursuant to Article 11 (below) are not included in the allotted amount(s) shown in 8 paragraph 8.C, below. Amounts for directed act ivities may be allotted from time to time throughout the period of this agreement. 3. There is currently allotted and available for expenditure in connection with reimbursement for directed activities under this agreement $0. C. Obligation For purposes of payment of the Foundation's portion of all allowable costs (including those incurred in connection with the performance of Directed Activities in accordance with Article 11 below) pursuant to the terms outlined in this Agreement, the tot al amount currently allotted by the Government to this Cooperative Agreement is $1,162,245. This allotment covers performance through March 31, 1994. D. Limitation of Funds 1. The parties estimate that performance of this Cooperative Agreement will not cost the Government more than the estimated amount specified in Article 8.A, Agreement Amount, above. The Awardee shall use its best efforts to perform the work specified in Article 3 and all obligations under this award within the allotted funds. 2. Paragraph C of this Article specifies the cumulative amount presently available for payment by the Government and allotted to this award. The parties contemplate that the Government will allot additional funds incrementally to the award up to the fu ll estimate specified in Article 8.A, Agreement Amount, above. 3. The Awardee shall notify the NSF Grants and Contracts Officer in writing whenever it has reason to believe that the costs it expects to incur under this Agreement in the next 60 days, when added to all costs previously incurred, will exceed 85% of th e total amount so far allotted to the Agreement by the Government. 4. When and to the extent that the amount allotted by the Government is increased, any costs the Awardee incurs before the increase that are in excess of the amount previously allotted by the Government, shall be allowable to the same extent as if incur red afterward. E. Compensation and Expenditures 1. As compensation for its performance under this agreement, Awardee shall be compensated for its direct and indirect costs (see Article 8.E.3) and shall be paid a fixed fee as provided in this agreement. 2. The Awardee shall also be reimbursed for such travel and related costs as may be specifically required and approved by the NSF Program Director pursuant to Article 11 (below). Expenditures under this agreement must be in accordance with a current Bud get or Program Plan which as been approved by the NSF Grants Officer and no reallocation of funds in excess of $10,000 between budget line items is permitted without prior written (or e-mail) approval of the NSF Program Official. 3. The amount currently allotted includes an indirect cost allowance at the following maximum provisional rates, subject to downward adjustment only: Internet Services [Proprietary Figure Omitted] Material Burden [Proprietary Figure Omitted] G&A [Proprietary Figure Omitted] F. Future Allotments The actual level of continued NSF support for future years will be negotiated annually with the Awardee and will depend upon annual review of progress, the proposed Program Plan and the availability of funds. The actual funding of such allotments may b e provided unilaterally by NSF on an incremental basis. 9 ARTICLE 9. ANNUAL REPORT, PROGRAM PLAN AND BUDGET By December 31 each year, the Awardee shall submit both electronically and in 10 hard copies an Annual Report, Program Plan and Budget to the Foundation for approval. These Program Plans and Budgets shall be submitted in a format and level of detail approved by the Foundation but shall, as a minimum, contain project goals and objectives specified with sufficient technical criteria, milestones, and timetables to measure the progress of the effort toward the attainment of objectives during the time period for which it is being submitted. This Program Plan will be the basis for the performance goals and funding for succeeding twelve month operational period beginning April 1. Each submission should contain narrative information indicating (for the past year's activities) by functional area and overall; any goals accomplished, exceeded, or missed and explaining any significant deviations from the previous year's plan; any educational achievements; patents, copyrights, or other innovations resulting from the activities; industrial and other funding, income and contributions. Each annual submission should also contain information on actual line charges and expenditures (both annual and cumulative) by functional area and overall, in the same level of detail for which it projects the succeeding year's costs, and a summary budget in accordance with NSF Form 1030. The Awardee will receive formal approval of the Program Plan from the NSF Grants Officer. The Foundation accepts (i) the Awardee's proposal as the Program Plan covering the period April 1, 1993, through May 31, 1994; and (ii) the budgets dated October 19, 1992, as the approved budgets for the period January 1, 1993, through May 31, 1994. ARTICLE 10. OTHER REPORTING REQUIREMENTS A. Timely Notification of Significant Problems The Awardee shall inform the NSF Program Official (either by e-mail or in writing) in a timely manner of any significant problems or events that could affect the overall schedule or progress in the program. B. Verbal Reports, Collaboration Briefings and Liaison 1. The Awardee shall meet on an informal basis, as necessary or requested, with the NSF Program Director to review progress to date and to exchange views, ideas, and information concerning the program. During the initial three (3) month phase in period, and thereafter until notified by the NSF Program Director, a weekly status review meeting shall be held to discuss the progress of the transition/phase in, including any problems or delays encountered and changes occasioned by same. (Such weekly status review meetings may be held by telephone and the substance thereof confirmed via e-mail when agreed. 2. The Awardee and Collaborators shall jointly meet, as requested, with the NSF Program Director to detail the progress and discuss the status of the collaboration effort and any difficulties being encountered in providing to the Internet community the seamless interface service envisioned by their collaborative proposal and called for in Article 2 in (above). It is currently contemplated that, at least during the first twelve (12) months of the award, such meetings shall be held quarterly at either NSF, the Awardee's or Collaborator's facilities. 3. When requested by the NSF Program Director, Awardee shall arrange to have its subawardees in attendance at meetings which deal with their areas of activity. In addition, at the request of the NSF Program Director, the Awardee shall arrange on-site meetings for the Program Officer, other Federal staff and/or representatives of the world-wide Internet community and the Awardee's professional personnel, and/or those of its subawardees. C. Monthly Letter Progress Reports 10 Monthly letter progress reports may be submitted electronically to the NSF Program Official and NSF Administrative Official at the address shown on the cover page. These (monthly letter progress) reports shall be submitted in such detail and format as required by the Foundation's Program Director and shall contain statistical and narrative information on the performance of the Awardee during the preceding month. D. Quarterly Status Report 1. Awardee shall prepare and furnish electronically and in four hard (4) copies quarterly letter status reports; the first quarterly status report will be for the period from January 1,1993, through March 31, 1993. These reports shall show the status of all major events and summaries and major work performed during the quarter, including technical status, accomplishments, problems, collaboration activities, changes in future plans, and any pending requests for NSF approval and should be fully reconciled with the information, goals and projections contained in the Annual Report and Program Plan. The report shall also include a summary of award expenditures and line charges both cumulative and for the current quarter. 2. The report shall be prepared on a quarterly basis and shall be submitted within (30) days after the reporting period ends. No quarterly report need be submitted for the quarter in which the Annual Reports are submitted, but, Awardee must insure that any germane information for the quarter not contained in the Annual Report (i.e., list of pending requests for NSF approval) and submitted by separate letter. E. Final Report The Awardee shall submit electronically and in ten hard (10) copies a final report to NSF at the conclusion of the Cooperative Agreement. The final report shall contain a description of all work performed and problems encountered (and if requested a copy and documentation of any and all software and data generated) in such form and sufficient detail as to permit replication of the work by a reasonably knowledgeable party or organization. F. Submission of Reports All reports and Program Plans are to be forwarded to the Foundation electronically. Hard copies of reports are indicated to be forwarded in the specified number of copies to the following destinations: No. of Copies Addressee 1 National Science Foundation e-mail: awilson@nsf.gov ATTN: Alfred W. Wilson Division of Grants and Agreements, Room 495 Arlington, VA 22230 [Amend 01] Remainder National Science Foundation e-mail: dmitchel@nsf.gov ATTN: Donald Mitchell Division of Networking and Communications Research and Infrastructure, Room 1175 Arlington, VA 22230 [Amend 01] 11 ARTICLE 11. DIRECTED ACTIVITIES From time to time the NSF Program Director may require the Awardee to attend such meetings, seminars, conferences and planning and other events and/or to provide related supplies and services as necessary to disseminate information regarding registration services activity to the worldwide Internet community and/or to facilitate the most effective, efficient and ubiquitous registration services possible on an expedited basis. In such a case, the following procedures will be followed; A. The NSF Program Director shall request, by e-mail, the Awardee's attendance or special services required and an estimate by the Awardee of any reimbursable costs involved; B. Awardee shall submit to the NSF Program director, by e-mail, its estimate of any such reimbursable costs involved; and C. the NSF Program Director shall forward to the Awardee a letter directive requesting that the travel be performed and/or the special services be provided and specifying the maximum amount that Awardee will be reimbursed for its efforts pursuant to the letter directive. D. Pursuant to such a letter directive, Awardee may incur costs against the "Directed Activities" amounts included in the approved budget provided (i) that the costs so incurred do not exceed the maximum amount specified in the letter directive and (ii) provided also that the awardee may not incur costs under a letter directive if such costs, when combined with costs incurred under other letter directives will exceed the amount allotted for directed activities as set forth in Article 8.B.2 (above). ARTICLE 12. KEY PERSONNEL A. The following individuals are considered key personnel and essential to the work: Alan S. Williamson John Zabluski B. Any changes in the individual (s) or significant changes in their proposed level of effort as set forth in the approved Program Plan for any period requires the prior written approval of the NSF Grants and Contracts Officer. ARTICLE 13. ORDER OF PRECEDENCE Any inconsistency in this Cooperative Agreement shall be resolved by giving precedence in the following order (a) the Special Provisions; and (b) Grant General Conditions (5/94) and Cooperative Agreement General Conditions (5/94). [Amend 01] ARTICLE 14 PUBLICITY, PUBLIC INFORMATION, AND PUBLICATIONS 12 A. All news releases, public information brochures, publications and other similar items (not limited to printed media, and including video, etc., prepared by Awardee, subawardees, and/or their employees or contractors which describe activities or results under this Registration Services Agreement shall: 1. acknowledge the sponsorship of NSF: 2. be sent to NSF in reasonable quantities for project and related NSF distribution before being distributed or shown to the public; and 3. in the case of news releases or public information, be coordinated with and have the approval of the NSF Program Official before release. B. An acknowledgment of NSF support must appear in any publication of any material, whether copyrighted or not, based upon or developed under this project, in substantially the following terms: The material is based on work sponsored by the National Science Foundation under Cooperative Agreement No. NCR-9218742. The Government has certain rights in this material. C. All writings such as reports, books, journal articles, software, data bases, sound recordings, video tapes and video discs, except scientific articles or papers published in scientific, technical or professional journals, must also contain the following disclaimer: Any opinions, findings and conclusions or recommendations expressed in this publication are those of the author(s) and do not necessarily reflect the views of the National Science Foundation. ARTICLE 15. PROJECT INCOME FROM REGISTRATION FEES A. If, and to the extent that Awardee is authorized and/or directed to charge and collect user fees for the Registration Services provided hereunder, any user fees so collected shall be placed in an interest bearing account, and shall be used to defray the Awardee's and the Foundation's Project expenses in the following descending order of priority: 1. Project expenses incurred by Awardee as a result of the imposition of such fees. 2. Project expenses of the Awardee charged to the Foundation under this award. (Program Plans and future year funding requests should reflect any such Income. 3. Project expenses of Awardee's Collaborators charged to the Foundation under their respective Awards. (Program Plans and future year funding requests should reflect any such inform and project fund transfers. 4. The provisions of this Article shall apply only to any Project Income which is generated from the imposition of user based fees on registration services. Article 19, Project Income, of the General Conditions shall apply to project related revenue from any other source [Amend 01]. 13 NSF Cooperative Agreement No. NCR-9218742, Amendment 1 Mr. David M. Graves Contracts Administrator Network Solutions, Inc. 505 Huntmar Park Drive Herndon, Virginia 22070 Cooperative Agreement No. NCR-9218742 Amendment 01 Proposal No. NCR-9442033 Dear Mr. Graves: This amendment increases the funds available under Cooperative Agreement No. NCR-9218742 by $1,258,457. These funds are for the continued support of the "Network Information Services Manager(s) for NSFNET and the NREN," in accordance with the letter and revised budget dated February 25, 1994.The amount also includes $5,000 for Research Experiences for Undergraduates (REU) in accordance with the proposal and budget April 7, 1994. The Foundation hereby approves the Awardee's Program Plan dated January 3, 1994, covering the period April 1, 1994 through March 31, 1995. The referenced Cooperative Agreement, is hereby amended as follows: Under II. GENERAL CONDITIONS and Article 6.B2b(2)., and Article 13.b., delete referenceds to NSF GC-1 (10/91), and substitute NSF GC-1 (5/94). A copy is enclosed. Under II. GENERAL CONDITIONS and Article 13.b., delete references to NSF CA-1 (12/91) and substitute NSF CA-1 (5/94). A copy is enclosed. Under Article 6.B2c., delete CA-1 Article 37 (12/91). "Changes --Limitation of Funds," and substitute CA-1 Article 38 (5/94). "Changes -- Limitation of Funds." Under Article 8. "Funding," part A., "Agreement Amount," make the following change -- The current total estimated amount of this Cooperative Agreement, exclusive of such amounts as may be provided in connection with Directed Activities provided pursuant to Article 11 is $5,998,374 of which [Proprietary Figure Omitted] Under Article 8.B1., delete $1,162,245 and substitute $2,420,702, of which [Proprietary Figure Omitted] Under Article 8.C., delete $1,162,245 and substitute $2,420,720. By this amendment, $1,258,457 covers performance through March 31, 1995. On the Cooperative Agreement face pag and Under Article 10, "Other Reporting Requirements," part F., "Submission of Reports," delete the name and address of the NSF Program Administrative Official and Program Official and insert -- 14 NSF Administrative Official Alfred W. Wilson Division of Grants and Agreements Room 495 Arlington, VA 22230 e-mail awilson@nsf.gov NSF Program Official Donald Mitchell Division of Networking and Communications Research and Infrastructure Room 1175 Arlington, VA 22230 e-mail dmitchell@nsf.gov Under Article 15.A4., delete Article 18. "Project Income," and substitute Article 19. "Project Income." Except as modified by this amendment, terms and conditions of this Agreement, including the expiration date remain unchanged. Please indicate your acceptance of the agreement by having an authorized official of your organization sign and return one copy as soon as possible. Karen L. Sandberg Grants and Agreements Officer 15 NSF Cooperative Agreement No. NCR-0218742, Amendment 2 Mr. David M. Graves Contract Administrator Network Solutions, Inc. 505 Huntmar Park Drive Herndon, Virginia 22070 Cooperative Agreement No. NCR-9218742 Amendment No. 02 Dear Mr. Graves: The referenced Cooperative Agreement is hereby amended in accordance with Network Solutions, Incorporated (NSI) letter dated January 4, 1995. Under Article 12. Key Personnel, substitute: Robert W. McCollum and Mark A. Kosters for Alan S. Williamson Deborah B. Fuller for John Zabluski The cognizant NSF Program official is Priscilla Jane Huston, 703-306-1950; the cognizant NSF Grant and Agreements Official is Alfred W. Wilson 703-306-1212. Sincerely, Mary Frances O'Connell Grants and Agreements Officer 16 NSF Cooperative Agreement No. NCR-9218742, Amendment 3 Mr. Dave M. Graves Contracts Administrator Network Solutions, Inc. 505 Huntmar Park Drive Herndon, VA 22070 Cooperative Agreement No. NCR-9218742 Amendment No. 03 Proposal No. NCR - 9543563 Dear Mr. Graves: The National Science Foundation (NSF) hereby awards $1,948,632 to Network Solutions, Inc. for additional support in accordance wi the Program Plan entitled "Network Information Services Manager(s) for NSFNET and the NREN," submitted May 5, 1995, and revis ed budged dated August 18, 1995. The Foundation hereby approves the Awardee's Year 3 Program Plan dated May 5, 1995 covering the period April 1, 1995 through March 31, 1996 with the following exception: The Foundation is reviewing the fee-for-service concept outlined in Network Solutions letters of June 19, 1995 and June 30, 1995, as well as any modifications of the Cooperative Agreement which may be required to implement the fee-for-service concept. The Cooperative Agreement, as amended, is further amended as follows: Under Article 8.B1., delete $2,420,702, and substitute $4,369,334, of which [Proprietary Figure Omitted] Under Article 8.C., delete $2,420,702 and substitute $4,369,334. By this amendment, $1,948,632 covers performance through September 30, 1995. It is understood that funding for Awardees performance beyond September 30, 1995 will require either the allotment of additional funds or NSF approval to initiate fees for registration services in accordance with Article 3.G. of the Cooperative Agreement. The amount awarded includes indirect cost allowance at the rates specified in the approved budget. These maximum provisional rates are subject to downward adjustment only. The Foundation authorizes the grantee to enter into the proposed contractual arrangements and to fund such arrangements with Cooperative Agreement funds up to the amount indicated in the approved budget. Such consistent with the applicable Cooperative Agreement general terms and conditions and any special conditions included in the Cooperative Agreement. 17 Except as modified by this amendment, terms and conditions of this Cooperative Agreement, including the expiration date remain unchanged. Please indicate your acceptance of this amendment by having an authorized official of your organization sign and return one copy as soon as possible. Sincerely, Carol A. Langguth Grants and Agreements Officer 18 NSF Cooperative Agreement No. NCR-9218742, Amendment 5 NATIONAL SCIENCE FOUNDATION 4201 WILSON BOULEVARD ARLINGTON , VIRGINIA Jan. 6, 1997 Mr. Dave M. Graves Contract Administrator Network Solutions, Inc. 505 Huntmar Park Drive Herndon, VA 22070 Cooperative Agreement No. NCR-9218742 Amendment No. 05 Dear Mr. Graves: The purpose of this amendment is to cover the following administrative actions with respect to the NSI Cooperative Agreement No. NCR-9218742. The Foundation hereby approves the following: - - The Foundation hereby approves the Awardee's Annual Progress Report for Year 3 submitted October 10, 1996 However, consistent with the previous agreement between NSI and NSF, NSI will bear the costs ($61,979) of computer equipment listed in the "materials and supplies" category of the Year 3 Financial Report and NSF will not reimburse these costs. In addition, fees in excess of the costs incurred (including the litigation costs associated with the Knowledgenet suit) for work not d.one during the period April 1, 1995 through September 13, 1995 will not be invoiced by NSI nor paid by NSF. - - The Foundation hereby approves the Awardee's Year 4 Program Plan dated October 10, 1996 covering he period April 1, 1996 through March 31, 1997. - - The Foundation hereby approves payment of the Awardee's invoice covering litigation costs with Knowledgenet, Inc. in the (reduced) amount of $74,617. This amount includes only the actual cost of the litigation and associated fee amount. - - NSF authorizes the Awardee to invoice NSF via the Electronic Fund Transfer process for payment (when due) of registration and renewal fees for the .EDU and .GOV domain names at the rates set forth in this agreement. The Awardee's invoices and NSF payment of these fees will not exceed $253,300 Except as modified by this amendment, all other Agreement terms and conditions remain unchanged. Sincerely, Karen Sandberg Grants and Agreements Officer EX-10.2 5 AMEND #4 TO COOPERATIVE AGREEMENT 1 EXHIBIT 10.2 NSF Cooperative Agreement No. NCR-9218742, Amendment 4 NATIONAL SCIENCE FOUNDATION 4201 WILSON BOULEVARD ARLINGTON, VIRGINIA 22230 September 13, 1995 Mr. Dave M. Graves Contracts Administrator Network Solutions, Inc. 505 Huntmar Park Drive Herndon, VA 22070 Cooperative Agreement No. NCR-9218742 Amendment No. 04 Proposal No. NCR-9544193 Dear Mr. Graves: The purpose of this amendment is to modify the agreement to allow for the collection of user fees for registration services and establish the provisions for the use, disbursement and accountability of Program Income generated by such fees. The Foundation and the Awardee hereby agree that the imposition of user fees for registration services will be carried out in accordance with the following general guidelines: 1.NSI will provide Registration and information Services as outlined in your approved Year 3 Program Plan. 2.Effective 12:00 A.M. EDST, September 14, 1995, Awardee is authorized to impose an annual fee of $50/year per 2nd level domain name in .gov, .edu, .com, .net, and .org to pay for the services provided. NSF will pay the annual fee for domain name holders in .edu and .gov on a temporary basis. (The specifics of the imposition include an initial charge of $100 for two years for new registrants and $50/year payable on the anniversary date of the original registration for every year thereafter. Existing domain name holders will be charged the $50/year on their anniversary date.) 3.The funds collected by reason of the fee imposition will be treated as "Program Income" under the terms of the agreement. Of those funds: a. 70% will be available to Awardee as consideration for the services provided. b. the remaining 30% will be placed into an interest-bearing account which will be used for the preservation and enhancement of the "Intellectual Infrastructure" of the Internet in general conformance with approved Program Plans. Awardee will develop and implement mechanisms to insure the involvement of the Internet communities in determining and overseeing disbursements from this account. Awardee will 2 also establish and maintain publically available records of all deposits to and disbursements from the account. 4.Any changes in the fee structure or amount will require approval (as set forth in Article 3.G of the agreement). 5.Awardee will continue to submit a Program Plan for approval by NSF in advance of each Program Year, to submit monthly, quarterly, and annual reports and attend/host quarterly InterNIC reviews as requested by the NSF Program Official. The specific details of the implementation of user fees will be as set forth in Awardees letter of September 13, 1995 (including all attachments) which is incorporated herein by reference. The Agreement, as amended, is hereby further amended as follows: 1.In Article 2.A.1, effective with this amendment, the reference to "General Atomics under Cooperative Agreement NCR-9218179" is hereby deleted, (reflecting the recent termination of that agreement). 2.To Article 4, the following section D is added: "D. Beginning in November 1995, the Awardee shall make available on rs.internic.net performance measures for registration services and turnaround times, as well as Awardee's performance against those measures and turnaround times for public review and comment." 3.To Article 5, the following section C is added: "C. The report generated by the performance review required by paragraph B. above will be available at ds.internic.net for public review." 4.In Article 8: a. In section C. delete the date "September 30, 1995" and substitute in lieu thereof the date "September 13, 1995", and; b. Add the following section G: Article 8. Funding contained in the original cooperative agreement, and as amended by Amendments No. 1, 2 and 3 and above shall apply for the period January 1, 1993 through September 13, 1995). Effective September 14, 1995, the following shall apply: Compensation: In consideration of all work performed under this agreement after September 13, 1995, Awardee shall impose a user fee of $50/year per second level domain name in .gov, .edu, .com, .net, and .org to pay for the services provided as detailed in Awardees proposal of September 13, 1995. (The specifics of the imposition include an initial charge of $100 for two years for new registrants and $50/year payable on the anniversary date of the original registration for every year thereafter. Existing domain name holders will be charged the $50/year on their anniversary date.) Implementation of the user fee imposition shall be in general accordance with Awardees proposal of September 13, 1995. NSF shall pay the fees for the second level domain name registrations in the .edu domain for the period of this agreement, and shall on an interim basis support the fees for second level domain name registrations in the .gov domain. Notwithstanding the foregoing, Awardee will defer invoicing of fees for registrations in 3 the .edu and .gov domains until a further amendment is added explicating the provisions for the invoicing and payment of these fees. The funds collected by reason of the user fee imposition will be considered "Program Income" under the terms of the agreement. Of these funds: a. 70% will be available to NSI as consideration for the services provided. b. the remaining 30% will be placed into an interest-bearing account which will be used for the preservation and enhancement of the "Intellectual Infrastructure" of the Internet. Awardee will develop and implement mechanisms to insure the involvement of the Internet communities in determining and overseeing disbursements from this account. Awardee will also establish and maintain publically available records of all deposits to and disbursements from the account. 5.Effective October 1, 1995, Article 9, Annual Report, Program Plan and Budget, (effective for the period January 1, 1993 through September 30, 1995) is hereby superseded and replaced by the following Article 9. Annual Report, Program Plan and Budget: ARTICLE 9. Annual Report, Program Plan and Budget By January 31 each year, Awardee shall submit both electronically and in 10 hard copies an Annual Report, Program Plan and Budget to the Foundation for approval. These documents shall be submitted in a format and level of detail approved by the Foundation but shall, as a minimum, contain project goals and objectives specified with sufficient technical criteria, milestones, and objectives to measure the progress of the effort toward attainment of objectives during the time period for which it is being submitted. The Program Plan will be the basis for performance goals, areas of emphasis and any adjustments in the user fee charged for registration services (or the distribution of revenues from those fees in the succeeding 12 month period). Each submission should contain narrative information indicating (for the past years' activities) by functional area and overall: any goals accomplished, exceeded or missed and explaining any significant deviations from the previous year's plan; any educational achievements; patents, copyrights or other innovations resulting from the activities. Each annual submission shall also contain information on projected revenues and expenditures for the upcoming year and actual projected revenues and expenditures for the reporting period. The Awardee will receive a formal approval of the Program Plan from the Foundation. 6.Effective September 14, 1995, Article 15. Project Income from Registration Fees is superseded and replaced in its entirety by the following: Article 15. Revenues from Registration Fees All income generated by the imposition of user fees charged for registration services shall be considered "Project Income" within the agreement. Distribution and use of these funds shal~ be made in accordance with the provisions of Article 8. (as amended above) and Awardee's proposal of September 13, 1995. Please indicate your acceptance of this amendment by having it signed by an authorized official of your organization and returning one copy to me as soon as possible. Sincerely, Karen L. Sandberg Grants and Agreements Officer EX-10.3 6 MASTER SERVICES AGREEMENT 1 EXHIBIT 10.3 MASTER SERVICES AGREEMENT FOR SYSTEM MANAGEMENT SERVICES REFERENCE NO.012272-001-001 BY AND BETWEEN NATIONSBANC SERVICES, INC. AND NETWORK SOLUTIONS, INC. 2 MASTER SERVICES AGREEMENT REFERENCE NO.012272-001-001 TABLE OF CONTENTS
SECTION NO. SECTION HEADING - ---------- ----------------------------------------------- 1.0 Term of Agreement 2.0 Affiliates 3.0 Scope of Agreement 4.0 Mutual Representations and Warranties 5.0 Representations and Warranties of Company 6.0 Covenants 7.0 Force Majeure 8.0 Relationship/Personnel 9.0 Subcontracting 10.0 Ordering of Services 11.0 Non-Discrimination 12.0 Confidentiality 13.0 Security 14.0 Indemnification 15.0 Damages 16.0 Insurance 17.0 Minority Business Development Initiative 18.0 Administration 19.0 Pricing/Fees 20.0 Invoices/Taxes/Payments 21.0 Retention of Records/Audit 22.0 Termination 23.0 Notices 24.0 Assignment 25.0 Arbitration 26.0 Applicable Law 27.0 Miscellaneous EXHIBIT A GENERAL CLASSIFICATIONS FOR SERVICES EXHIBIT B JOB CATEGORIES EXHIBIT C NATIONSBANC MASTER CONTRACT TIME AND MATERIAL/LABOR HOUR RATES
3 MASTER SYSTEM MANAGEMENT SERVICES AGREEMENT REFERENCE NO.012272-001-001 This Master System Management Services Agreement ("Agreement") is entered into by and between NationsBanc Services, Inc. ("NBSI") and Network Services, Inc. ("Company"). This Agreement establishes the terms, conditions and consideration under which Company will provide services ("Services") for System Management Services as specified in EXHIBIT B, attached and by this reference incorporated hereto. 1.0 TERM OF AGREEMENT 1.01. INITIAL TERM. This Agreement shall apply and remain in effect from January 1, 1997 through December 31, 1999, excluding any potential renewal term(s) ("Initial Term") unless sooner terminated as provided herein. 1.02. EXTENSIONS. NBSI shall have the right to extend this Agreement for an additional twelve (12) month period(s) ("Renewal Term") by giving Company written notice of its intent at least thirty (30) calendar days prior to the end of the Initial Term. 1.03. CONTINUATION OF AGREEMENT. In the event NBSI fails to notify Company of its intent to renew or terminate this Agreement, the Agreement shall continue in effect on a month-to-month basis, at the prices last offered for Services under the Initial Term, until canceled by either party upon thirty (30) calendar days prior written notice to the other. 2.0 AFFILIATES 2.01. Definition. When used in this Agreement, the term "NBSI Affiliate" shall mean all entities now or hereafter controlling, controlled by, or under common control, directly or indirectly, of NBSI or NBSI's parent. 2.02. RIGHTS OF NBSI AFFILIATES. Company expressly acknowledges and agrees that (a) NBSI has contracted with Company under this Agreement in order to satisfy current or future obligations of NBSI to, or requirements of, one or more NBSI Affiliates, (b) to the extent that the interests of NBSI Affiliates are affected by this Agreement, all obligations of Company under this Agreement shall extend, and all rights and privileges of NBSI shall accrue, to the NBSI Affiliates to the same extent as such obligations, rights and privileges extend or accrue to NBSI under this Agreement, and (c) notwithstanding the foregoing, NBSI shall solely be responsible to Company for the performance of NBSI's obligations under this Agreement. 3.0 SCOPE OF THE AGREEMENT 3.01. Company will provide the Services as set forth in EXHIBIT B, attached hereto, in accordance with the requirements for Services set forth therein. 3.02. Any written document submitted to NBSI by Company in connection with this Agreement, including but not limited to, invoices, Services schedules, and the like shall reference, as applicable, Contract Task Order number and/or Agreement reference number. 4.0 MUTUAL REPRESENTATIONS AND WARRANTIES 4.01. Each party represents and warrants the following: (a) in performance of its obligations under this Agreement, each party shall act fairly and in good faith; (b) its execution, delivery and performance of this Agreement (i) have been authorized by all necessary corporate action, (ii) do not violate the terms of any law, regulation, or court order to which such party is subject, or the terms of any material agreement to which the party or any of its assets may be subject, and (iii) are not subject to the consent or approval 1 4 of any third party; (c) this Agreement is the valid and binding obligation of the representing party, enforceable against such party in accordance with its terms; and (d) such party is not subject to any pending or threatened litigation or governmental action which could interfere with such party's performance of its obligations hereunder. 5.0 REPRESENTATIONS AND WARRANTIES OF COMPANY 5.01. In rendering its obligations under this Agreement, without limiting other applicable performance warranties, Company represents and warrants to NBSI as follows: (a) all work will be performed in a professional and workmanlike manner; (b) Company is in good standing in the state of its incorporation and is qualified to do business as a foreign corporation in each of the states in which it is providing services hereunder; and (c) Company shall secure all permits, licenses, regulatory approvals and registrations required to render services set forth herein, including without limitation, registration with the appropriate taxing authorities for remittance of taxes. 6.0 COVENANTS 6.01. During the term of this Agreement, Company shall (a) use all reasonable efforts to avoid the disruption of normal operations of NBSI or any NBSI Affiliate; (b)at all times maintain capital and other financial resources sufficient to permit Company to perform its obligations under this Agreement; (c) pay its debts generally as they become due; and (d) at the request of NBSI, shall deliver to NBSI financial statements of Company as prepared by or for Company in the ordinary course of its business and covenant that such financial statements are true and correct in all material respects; and (e) notify NBSI immediately in the event there is a material adverse change in the business or financial condition of Company since the last submission of financial statements to NBSI. 7.0 FORCE MAJEURE 7.01. SUSPENSION OF OPERATIONS. Neither party shall be liable for damages for delay in the Services herein arising out of causes beyond its control and without its fault or negligence, including, but not limited to, act of God or of the public enemy, acts of the Government, fires, floods, epidemics, strikes, labor disturbances or freight embargoes (but not including delays caused by subcontractors or suppliers), provided that, in the case of Company, Company shall within ten (10) days from the beginning of such delay, notify NBSI in writing of the cause of delay and Company's contingency plan to cure such delay; however, if a delay exceeds a total of thirty (30) days, NBSI may terminate this Agreement. 7.02. CONTINGENCY PLAN. Company agrees to establish and maintain policies and procedures relevant to contingency plans, recovery plans, and proper risk controls to ensure Company's continued performance under this Agreement. Said policies and procedures must be in place within sixty (60) business days from the date of execution of this Agreement and shall include, but not be limited to, testing with respect to reasonable assurance of effectiveness, control functions with respect to accountability elements and corrective actions to be immediately implemented, if necessary. Company agrees to provide copies of said policies and procedures to NBSI, upon request. 8.0 RELATIONSHIP/PERSONNEL 8.01. INDEPENDENT CONTRACTOR STATUS. This Agreement shall not be construed as creating an employee/employer, agency, partnership, or joint venture relationship between Company (or any of its agents or employees) and NBSI or NBSI Affiliates. Each party shall have the obligation to supervise, manage, contract, direct, procure, perform or cause to be performed, all work to be performed under this Agreement and shall be liable for the acts or omissions of their employees and agents in performing their respective obligations hereunder. 8.02. CHANGE IN PERSONNEL. Upon the request of NBSI, Company agrees to immediately remove any of Company's employee(s) or agent(s) who's performance is unsatisfactory under this Agreement and replace such employee(s) or agent(s) as soon as practicable. 2 5 8.03. EMPLOYMENT. During the term of this Agreement including any extensions thereof, each party agrees not to recruit, solicit, or hire any of the other party's employees who are directly associated or performing under any Task Order issued under the Agreement. However, former employees of either party who have left the employ of that party for a period of six months during the term of this Agreement are not subject to this provision. Notwithstanding the above, the parties may jointly agree to waive this provision on a case-by-case basis upon prior thirty (30) Calendar Day written notice by the party seeking a waiver from this provision to the other party when it is in the best interests of either party's employee. Such notice shall be provided to the representative listed in Section 23 "Notices" below. No single waiver of this provision shall constitute a continuing or subsequent waiver. 9.0 SUBCONTRACTING 9.01. In performing its obligations under this Agreement, Company may engage subcontractors and other third parties ("Subcontractor(s)"). Company shall require all Subcontractors, as a condition to their engagement, to agree to be bound by provisions substantially identical to those included in this Agreement, specifically those relating to the indemnification of NBSI and NBSI Affiliates, insurance requirements, treatment of Confidential Information, and Security. Company shall notify NBSI in writing of its intent to engage a Subcontractor. The engagement of a Subcontractor by Company shall be subject to NBSI's prior written consent and shall not relieve Company of any of its obligations under this Agreement. 10.0 ORDERING OF SERVICES 10.01. (a) All products and Services to be purchased by NBSI hereunder shall be made pursuant to Task Orders issued by NBSI to Company. The terms and conditions this Agreement shall control all Task Orders issued under of this Agreement, and no terms or conditions contained in the Task Orders (other than the specific delivery instructions) shall be of any force or effect. (b) Each Task Order shall have a detailed statement of work describing the services ordered by that Task Order, number of labor hours, estimated direct costs and total ceiling amount of the Task Order. Each Task Order shall obligate a dollar amount against which Company shall invoice. Company shall not be required to perform work that would cause the not-to-exceed amount of the Task Order to be exceeded until the Task Order ceiling amount is increased by a Task Order modification. Task Orders become effective when executed by NBSI and received by Company's contract administrator listed in Section 23 "Notices". In the event NBSI changes its requirements subsequent to issuance of a Task Order, the Task Order must be modified in writing and executed by NBSI. Such modification shall be delivered to Company's contract administrator for Company's execution prior to Company being obligated to make changes to its performance under a Task Order(s). (c) Under each Task Order Company will provide personnel, its own employees, consultants or employees of its Subcontractors, who satisfy the minimum qualifications for the corresponding labor category they will perform under as set forth in Exhibit B of this Agreement. All hours provided under the Task Order(s) by Company's employees or its Subcontractors or consultants will be applied to the level of effort ordered by NBSI, plus or minus 10%. In order to perform under the Task Order(s) in the most effective manner Company may use more hours of one labor category and fewer hours of another category as long as Company does not exceed the ceiling amount of each Task Order. 10.02. NBSI reserves the right to require reasonable changes in the criteria and/or schedule of Services, consisting of additions, deletions or modifications. All such changes in Services shall be authorized in writing and mutually agreed to by both parties referencing this Agreement. 10.03. All instruments ("Instruments"), such as Contract Task Orders and invoices and the like used in conjunction with this Agreement shall be for the sole purpose of defining quantities, prices and a description of services or products to be provided hereunder, and to this extent only are incorporated as a part of this Agreement. Any terms and conditions included in Instruments beyond the purposes of 3 6 Instrument stated above shall not be incorporated and in no event shall such Instrument be construed to modify, amend, or alter the terms of this Agreement. 11.0 NON-DISCRIMINATION 11.01. EQUAL OPPORTUNITY EMPLOYERS. NBSI and Company are equal opportunity employers and do not discriminate in employment of persons or awarding of subcontracts because of a persons race, sex, age, religion, national origin, veteran or handicap status. 11.02. COMPLIANCE. Company is aware of and fully informed of Company's responsibilities and agrees to the provisions under the following: (a) Executive Order 11246, as amended or superseded in whole or in part, and as contained in Section 202 of said Executive Order as found at 41 C.F.R: Section 60-1.4(a)(1-7); (b) Section 503 of the Rehabilitation Act of 1973 as contained in 41 C.F.R. Section 60-741.4; and (c) The Vietnam Era Veterans' Readjustment Assistance Act of 1974 as contained in 41 C.F.R. Section 60-250.4. 12.0 CONFIDENTIALITY 12.01. DEFINITION. When used in this Agreement, the term "Confidential Information" shall mean this Agreement, all Proprietary Information (as defined below) and all data, trade secrets, business information and other information of any kind whatsoever which (a) has been disclosed to either party, or to which either party has access, in connection with the negotiation and performance of this Agreement, and (b) relates to (i) the other party, (ii) in the case of Company, the NBSI Affiliates and their customers, or (iii) third party vendors or licensors which have made confidential or proprietary information available to NBSI or an NBSI Affiliate. 12.02. PROPRIETARY INFORMATION. When used in this Agreement, the term "Proprietary Information" shall mean all work performed under this Agreement and all work product resulting from such work, including, without limitation, all data, designs, software, programs, card decks, tapes, ideas, concepts, techniques, inventions, proprietary rights, modifications and enhancements, together with all applicable rights to patents, copyrights, trademarks and trade secrets. 12.03. NON-DISCLOSURE. Each of the parties on behalf of itself and its employees, officers, directors, affiliates and agents, hereby agrees that Confidential Information will not be disclosed or made available to any third party, agent or employee for any reason whatsoever, other than with respect to: (a) its employees on a "need to know" basis; (b) subcontractors and other third parties specifically permitted under this Agreement, on a "need to know" basis, provided that all such parties are subject to a confidentiality agreement which shall be no less restrictive than the provisions of this Section (in favor of NBSI and NBSI Affiliates and in form and substance satisfactory to NBSI); (c) independent contractors, agents, and consultants hired by NBSI, provided that NBSI uses reasonable efforts to cause such parties to maintain the confidentiality of Company's Confidential Information; and (d) as required by law or as otherwise permitted by this Agreement, either during the term of this Agreement or after the termination of this Agreement, provided that, prior to any disclosure of either party's Confidential Information as required by law, the party subject to the requirement shall (i) notify the other party of all, if any, actual or threatened legal compulsion of disclosure, and any actual legal obligation of disclosure immediately upon becoming so obligated, and (ii) cooperate with the other party's reasonable, lawful efforts to resist, limit or delay disclosure. Nothing in this Section shall prohibit or limit either party's use of information or data (a) that can be demonstrated to have been previously known to it, other than through its relationship with the other party, without a confidentiality restriction on the use of such information, (b) independently developed by it, as established by written evidence, (c) rightfully acquired by it from a third party with full legal right to disclose such information, (d) disclosed without similar restrictions by the party that disclosed such Confidential Information pursuant to this Agreement to a third party, (e) approved for disclosure by the affected party pursuant to this Agreement, or (f) which becomes part of the public domain through no breach of this Agreement. 4 7 12.04. EXCEPTIONS. Nothing in this Section shall prohibit or limit either party's use of information or data (a) that can be demonstrated to have been previously known to it, other than through its relationship with the other party, without a confidentiality restriction on the use of such information, (b) independently developed by it, as established by written evidence, (c) rightfully acquired by it from a third party with full legal right to disclose such information, (d) disclosed without similar restrictions by the party that disclosed such Confidential Information pursuant to this Agreement to a third party, (e) approved for disclosure by the affected party pursuant to this Agreement, or (f) which becomes part of the public domain through no breach of this Agreement. 12.05. RETURN OF CONFIDENTIAL INFORMATION. Upon the termination of this Agreement, or at any time upon the request of the other party, each party shall return all Confidential Information in the possession of such party or in the possession of a third party (over which such party has or may exercise control). 12.06. INJUNCTIVE RELIEF. In the event of any breach of the obligations under this Section, each party acknowledges that the other party would have no adequate remedy at law, since the harm caused by such a breach would not be easily measured and compensated for in damages, and that in addition to such other remedies as may be available to the other party, the other party may obtain injunctive relief including, but not limited to, specific performance. 12.07. PUBLICITY. All media releases, public announcements and public disclosures by either party, or their employees or agents, relating to this Agreement or the name of NBSI, any NBSI Affiliate or Company, including, without limitation, promotional or marketing material, but not including any announcement intended solely for internal distribution by the releasing party or any disclosure required by legal, accounting or regulatory requirements beyond the reasonable control of the releasing party, shall be coordinated with and approved by the other party in writing prior to the release thereof. 12.08. SURVIVAL. The provisions of this Section shall survive the term or termination of this Agreement for any reason. 13.0 SECURITY 13.01. DEFINITION. Company understands that NBSI and NBSI Affiliates operate under various laws and federal regulatory agencies that are unique to the security sensitive banking industry, As such, persons engaged by Company to provide services under this Agreement are held to a higher standard of conduct and scrutiny than in other industries or business enterprises. Company understands and acknowledges that its employee(s) ("Employee(s)") shall possess appropriate character, disposition and honesty conducive to the environment where services are provided under this Agreement. Company shall, to the extent permitted by law, exercise reasonable and prudent efforts to comply with the Security provisions of this Agreement. 13.02. ACCESS. Company shall not knowingly permit an Employee(s) to have access to the premises, records or data, or to engage in the conduct of the banking affairs of NBSI or NBSI Affiliates when such Employee(s): (a) has been convicted of a crime or has agreed to or entered into a pretrial diversion or similar program in connection with (i) a dishonest act or a breach of trust, as stipulated under Section 19 of the Federal Deposit Insurance Act, 12 U.S.C. 1829(a); and/or (ii) a felony; (b) uses illegal drugs. 13.03 COMPLIANCE. Upon written request from NBSI, Company shall provide evidence of Company's actions to comply with the above provisions for its Employee(s). 13.04 NOTIFICATION. NBSI shall notify Company of any act of dishonesty or breach of trust committed against NBSI or NBSI Affiliates which may involve an Employee(s) and Company shall notify NBSI if it becomes aware of any such offense. Following such notice, at the request of NBSI and to the extent permitted by law, Company shall cooperate with investigations conducted by or on behalf of NBSI or NBSI Affiliates. Such cooperation may include access to Company's Employee(s) for personal 5 8 interviews related to such investigations. In addition, at the request of NBSI, Company shall conduct its own investigations into the activities of said Employee(s), which may include polygraph examinations when permitted by law and not specifically prohibited by existing collective bargaining (Union) agreements or state statutes, with the results of such investigations and all files and records related thereto being made available to NBSI. 13.05. INTERNAL CONTROLS. Company shall cooperate with the internal operating controls and security processes of NBSI and NBSI Affiliates where products and/or services are provided under this Agreement. 14.0 INDEMNIFICATION 14.01. Company shall indemnify, defend, and hold harmless NBSI and the NBSI Affiliates and their respective officers, directors, employees, agents, successors and permitted assigns from and against any and all claims made, or asserted, or threatened by any third party and all related losses, expenses, damages, costs and liabilities, including reasonable attorneys' fees and expenses incurred in investigation or defense, arising out of or related to the following: (a) any act or omission by Company, its employees and agents or any Subcontractor engaged by Company in the performance of Company's obligations under this Agreement or otherwise; (b)any material breach in a representation, covenant or obligation of Company contained in this Agreement; (c) any claims that, in using the Products or Services provided to NBSI under this Agreement, NBSI or an NBSI Affiliate has infringed the proprietary rights of any third party; or (d) Company's relationship with its employees, agents or Subcontractors or its capacity as an employer. 14.02. NBSI shall indemnify, defend, and hold harmless Company and its respective officers, directors, employees, agents, successors and permitted assigns from and against any and all claims made, or asserted, or threatened by any third party and all related losses, expenses, damages, costs and liabilities, including reasonable attorneys' fees and expenses incurred in investigation or defense, arising out of or related to the following: (a) any act or omission by NBSI, its employees and agents or any Subcontractor engaged by NBSI in the performance of NBSI's obligations under this Agreement or otherwise; (1))any material breach in a representation, covenant or obligation of NBSI contained in this Agreement; or (c) NBSI's relationship with its employees, agents or Subcontractors or its capacity as an employer. 15.0 DAMAGES 15.01. CERTAIN RECOVERABLE DAMAGES. Damages recoverable under this Agreement shall include, without limitation, costs, expenses, losses and injuries incurred or suffered by: (a) NBSI or an NBSI Affiliate, as a result of an act, omission, breach, breach of warranty, non-performance or misrepresentation of Company; or (b) NBSI, on account of claims made against NBSI by an NBSI Affiliate, or payment of claims made by NBSI to an NBSI Affiliate, to the extent that such claims or payments result (directly or indirectly) from an act, omission, breach, breach of warranty, non-performance or misrepresentation of Company. 15.02. CONSEQUENTIAL DAMAGES. Neither Company nor NBSI shall be liable for those consequential damages which consist of lost profits or loss of goodwill; provided, however, that the limitations set forth in this Section shall not apply to or in any way limit (a) Company's indemnity obligations under this Agreement, or (b) Company's liability to NBSI or an NBSI Affiliate for consequential damages which arise from Company's gross negligence or willful misconduct. 15.03. ENFORCEMENT EXPENSES. If either party employs an attorney or commences legal or arbitral proceedings to enforce the provisions of this Agreement, the prevailing party shall be entitled to recover from the other, reasonable costs incurred in connection with such enforcement, including but not limited to, attorney's fees and costs of investigation and litigation/arbitration. 16.0 INSURANCE 6 9 16.01. REQUIREMENTS. Company shall, and shall require its Subcontractors to, secure and maintain, at its own expense, throughout the entire term of this Agreement, the following insurance and shall furnish to NBSI certificates evidencing such insurance prior to commencing work. Said certificates shall contain a provision whereby the policy and/or policies shall not be canceled or altered without at least thirty (30) calendar days prior written notice to NBSI. (a) WORKER'S COMPENSATION/EMPLOYERS' LIABILITY. Worker's Compensation Insurance which shall fully comply with the statutory requirements of all applicable state and federal laws and Employers' Liability Insurance which limit shall be $500,000 per accident for Bodily Injury and $500,000 per employee/aggregate for disease. Company and its underwriter shall waive subrogation against NBSI. (b) COMMERCIAL GENERAL LIABILITY. Commercial General Liability Insurance with a minimum combined single limit of liability of $1,000,000 per occurrence and $2,000,000 aggregate for bodily injury and/or death and/or property damage and/or personal injury. This shall include products/completed operations coverage and shall also include Broad Form Contractual specifically covering this Agreement. Further, NBSI is to be added as an Additional Insured on this policy with respect to operations covered under this Agreement. (c) BUSINESS AUTOMOBILE LIABILITY. Business Automobile Liability Insurance covering all owned, hired and non-owned vehicles and equipment used by Company with a minimum combined single limit of liability of $1,000,000 for injury and/or death and/or property damage. (d) EXCESS COVERAGE. Excess coverage with respect to (A), (B) and (C) above with a minimum combined single limit of $5,000,000. (e) FIDELITY BOND. Company shall be responsible for loss to bank property and customer property, directly or indirectly, from dishonest acts of its employees in a minimum amount of $1,000,000. Company shall maintain Fidelity Bond coverage and NBSI shall be named as "Loss Payee, As Their Interest May Appear," on this Fidelity Bond. 17.0 MINORITY BUSINESS DEVELOPMENT INITIATIVE 17.01. Company recognizes the NationsBank Minority Business Development Initiative supporting Minority and Women-Owned Business Enterprises and is committed, to the maximum extent practicable, participation with minority and women-owned business enterprises in its construction, procurement, and professional Services programs. 17.02. DEFINITIONS. For purposes of this Agreement, the following are the definitions of "Minority-Owned Business Enterprise" and "Women-Owned Business Enterprise": (a) "Minority-Owned Business Enterprise" is recognized as a "for profit" business concern, public or privately owned, which is at least fifty-one percent (51%) owned, controlled and operated by one or more "Minority Individuals" who maintain United States citizenship. (b) "Minority Individuals" are recognized as Black Americans, Hispanic Americans, Native Americans (American Indians, Eskimos, Aleuts, and native Hawaiians), Asian-Pacific Americans, and other minorities as recognized by the United States Small Business Administration Office of Minority Small Business and Capital Ownership Development. (c) "Women-Owned Business Enterprise" is recognized as a "for profit" business concern which is at least fifty-one percent (51%) owned, controlled and operated by women who maintain United Stated citizenship. 7 10 (d) To quality as a Minority or Women-Owned Business Enterprise ("M/WBE") under this Agreement, the M/WBE must be certified by an agency acceptable to NBSI. 17.03. PARTICIPATION. (a) Company agrees that a minimum spending goal of five percent (5%) of the total dollar amount of this Agreement shall be provided by Minority Owned Business Enterprises. (b) Company agrees that a minimum spending goal of five percent (5%) of the total dollar amount of this Agreement shall be provided by Women Owned Business Enterprises. 17.04. Company shall provide NBSI monthly, by the 5th of each calendar month, a report which specifies the total amounts invoiced by and paid to such Minority and/or Women Owned Business Enterprises for the Calendar Month being reported. The report shall be in a format to be mutually agreed upon by Company and NBSI. 18.0 ADMINISTRATION 18.01. REPRESENTATIVES. Company shall designate an employee and NBSI shall designate employee(s) ("Representative(s)") to act on each respective party's behalf with regard to matters arising under this Agreement; however, such authority does not include the authority to alter or amend any term, condition, or provision of this Agreement. Thereafter, either party may change their respective Representative by providing the other party prior written notice. 18.02. CONSTRUING DOCUMENTS. Any terms and conditions included in purchase orders, invoices and the like used in conjunction with this Agreement shall be for the sole purpose of defining quantities, prices and a description of services or products to be provided hereunder and in no event shall such be construed to modify, amend, or alter the terms of this Agreement. 19.0 PRICING/FEES 19.01. FEES. NBSI shall pay Company for Services provided under this Agreement as set forth in EXHIBIT C hereto, 19.02. TRAVEL. Any travel by Company for the performance of Services under this Agreement shall be pre-approved by NBSI and reservations shall be made through NBSI's Travel Department, unless otherwise authorized by NBSI. Further, all pre-approved travel must be itemized on the monthly invoices submitted to NBSI and accompanied by supporting documentation. 19.03. ADDITIONAL FEES. ADDITIONAL FEES. Additional fees for Services not listed on EXHIBIT C shall be as mutually agreed in writing between NBSI and Company prior to performance. 19.04. The Service fees listed on EXHIBIT C may not be increased for a period of twelve (12) months from the date of this Agreement. Thereafter, the Service fees may only be increased by the mutual written agreement of NBSI and Company one time only during any twelve (12) month period. Company shall provide sixty (60) calendar days prior written notice to NBSI of any proposed price increases. Proposed price increases shall not exceed five (5%) percent of the current fees or the increase in the Consumer Price Index (CPI) for the preceding twelve (12) month period, whichever is less. 20.0 INVOICES/TAXES/PAYMENT 20.01. INVOICES. Invoices are to be submitted by Company monthly, in duplicate, to the address set forth in the applicable Contract Task Order. Invoices without reference to this Agreement reference number or listing Services that were not requested in writing by NBSI will not be paid but will be returned to Company. The items listed on Company's invoice must appear in the same sequence as listed on the Contract Task Order. 8 11 20.02. ITEMIZED INVOICES. Unless otherwise specified, invoices shall include and list all applicab1e taxes as a separate item. NBSI shall pay Company for all Services and applicable taxes invoiced in accordance with the terms of this Agreement, within thirty (30) calendar days of the date of receipt of invoice. 20.03. TAXES. NBSI will reimburse Company for all sales, use or excise taxes levied on amounts payable by NBSI to Company pursuant to this Agreement, provided that NBSI shall not be responsible for remittance of such taxes to applicable tax authorities. NBSI shall not be responsible for any ad valorem, income, franchise, privilege, value added or occupational taxes of Company. Company shall cooperate with NBSI's efforts to identity taxable and nontaxable portions of amounts payable pursuant to this Agreement (including segregation of such portions on invoices) and to obtain refunds of taxes paid, where appropriate. NBSI may furnish Company with certificates or other evidence supporting applicable exemptions from sales, use or excise taxation. 20.04. COMPLETION OF WORK. NBSI's payments, if any, for Services prior to the completion of such Services shall not diminish Company's obligations hereunder and shall not constitute a waiver of NBSI's rights or remedies hereunder. 21.0 RETENTION OF RECORDS/AUDIT 21.01. Retention of Records. For a period of not less than two (2) years after the termination of this Agreement, Company shall maintain at no additional cost to NBSI, in a reasonably accessible location, all material data, files and records pertaining to its performance under this Agreement and to charges and costs paid or payable by NBSI under this Agreement. 21.02. AUDIT. Throughout the term of this Agreement and for two (2) years thereafter, all of the Company's data, files and records referenced above may be inspected, audited and copied by NBSI, its duly authorized agents, representatives or employees or by federal or state agencies having jurisdiction over NBSI or an NBSI Affiliate, at such reasonable times as NBSI may determine. 22.0 TERMINATION 22.01. TERMINATION WITHOUT CAUSE. NBSI may terminate this Agreement at any time by providing Company with thirty (30) calendar days prior written notice indicating an intent to terminate. 22.02. TERMINATION UPON DEFAULT. In addition to any other remedies available to either party in law or equity or under this Agreement, upon the occurrence of a Termination Event (as defined below) with respect to either party, the other party may immediately terminate this Agreement by providing written notice of its intent to terminate. 22.03. TERMINATION EVENT. A Termination Event shall be deemed to have occurred if either party: (a) shall commit a material breach of its obligations under this Agreement, and the breach shall remain uncured for a period of thirty (30) calendar days after written notice of the breach is provided to the other party; (b) shall become insolvent, or generally unable to pay its debts as they become due, or shall become the subject of a bankruptcy, conservatorship, receivership or similar proceeding, or shall make a general assignment for the benefit of its creditors; (c) shall commit a fraudulent act against the other party; (d) shall fail to comply with any material law, statute, rule or regulation applicable to such party. 22.04. Termination of this Agreement, however, shall not preclude Company's obligation to satisfactorily complete any Services requested under any Contract Task Order in effect at the time of termination, at the option of NBSI. 22.05. SURVIVAL. All provisions of this Agreement and related obligations concerning indemnification, security, examination/audit, confidentiality and representations and warranties shall survive the termination of this Agreement. 9 12 23.0 NOTICES 23.01. All material notices or other communications or notices required under this Agreement shall be given to the parties in writing as follows: (a) by registered or certified United States mail, return receipt requested and postage prepaid to the applicable addresses below, or to such other addresses as the parties may substitute by written notice given in the manner prescribed in this Section; (b) by hand delivery, including courier service delivery, to such addresses; or (c) by facsimile machine transmission, to the numbers provided below: If to NBSI: If to Company: Telecommunications Contracts Department One Independence Center 505 Huntmar Park Drive 101 N. Tryon Street Herndon, VA 22070 NC1-001-02-07 Telephone No.: 703/736-0193 Charlotte, NC 28255-0001 Facsimile : 703/742-8449 Attn.: Otto Caudell, III Telephone No.: 704/386-4401 Facsimile: 704/386-8876 - and - Corporate Contracts & Procurement 127 North Tryon Street, 2nd Flood NCI-018-02-01 Charlotte, NC 28255 Attn.: Phyllis Warren Telephone No.: 704/386-8213 Facsimile: 704/386-8213
23.02. RECEIPT. Such notices shall be deemed to have been duly given either three (3) calendar days after the date of mailing as described above, or one (1) calendar day after being given to an express courier or when sent by facsimile and receipt confirmed. 24.0 ASSIGNMENT 24.01. ASSIGNMENT. Neither party may assign this Agreement or any of the rights or obligations under this Agreement without the prior written consent of the other party, and any such attempted assignment shall be void. Notwithstanding the foregoing however, NBSI may assign any of its rights and obligations under this Agreement to an NBSI Affiliate, the surviving corporation with or into which NBSI may merge or consolidate, or an entity to which NBSI transfers all, or substantially all, of its business and assets and Company may assign any of Company's rights and obligations under this Agreement to a Company subsidiary. 24.02. THIRD PARTY BENEFICIARIES. Subject to this Section, this Agreement shall be binding upon, and inure to the benefit of, the parties and their respective successors and assigns. Except as specifically set forth in this Agreement, the parties do not intend the benefits of this Agreement to inure to any third party, and nothing contained herein shall be construed as creating any right, claim or cause of action in favor of any such third party, against either of the parties hereto. 25.0 ARBITRATION 25.01. BINDING ARBITRATION. Any controversy or claim between or among the parties hereto shall be determined by binding arbitration in accordance with the Federal Arbitration Act (or if not applicable, the applicable state law), the Rules of Practice and Procedure for the Arbitration of Commercial Disputes of Judicial Arbitration and Mediation Services, lnc./Endispute, Inc. ("J.A.M.S./Endispute"), and if 10 13 J.A.M.S./Endispute is unable or legally precluded from administering the arbitration, then the American Arbitration Association ("AAA") will serve. 25.02. JUDGMENTS. Judgment upon any arbitration award may be entered in any court having jurisdiction. Any party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any controversy or claim to which this Agreement applies in any court having jurisdiction over such action in the Governing State set forth herein. 25.03. PROCEDURES. Upon receipt of demand for arbitration from either NBSI or Company, J.A.M.S./Endispute or AAA as applicable shall use its best efforts to appoint an arbitrator and notify NBSI and Company of such appointment within fifteen (15) calendar days and further to commence arbitration within ninety (90) calendar days. Any NBSI or Company demand for arbitration shall include detail sufficient to establish the nature of the dispute and shall be delivered to the other party concurrent with delivery to J.A.M.S./Endispute or AAA. 25.04. OTHER REMEDIES. Nothing in this Section shall limit the right of either Company or NBSI to obtain from a court provisional or ancillary remedies such as, but not limited to, injunctive relief, or the appointment of a receiver, before, during or after the pendency of any arbitration proceeding brought pursuant to this Agreement. 26.0 APPLICABLE LAW 26.01. This Agreement shall be governed by, and construed in accordance with, the laws of the State of North Carolina ("Governing State"). Each party hereby submits to the jurisdiction of such courts, and waives any objection to venue with respect to actions brought in such courts in the Governing State. 27.0 MISCELLANEOUS 27.01. CORRESPONDENCE. Where notice, approval or similar action by either party is permitted or required by any provision of this Agreement, such action shall not be unreasonably delayed or withheld. 27.02. COMPLETE AGREEMENT. This Agreement, including EXHIBITs and all materials attached hereto or referenced herein, constitute the entire agreement of NBSI and Company with respect to the subject matter of this Agreement and any agreement(s) between Company and NBSI or any NBSI Affiliate with respect to the subject matter is hereby superseded and shall hereafter have no force or effect. Other than those remedies specifically disclaimed in this Agreement, all remedies set forth in this Agreement shall be in addition to all other remedies available under this Agreement or at law or in equity. 27.03. AMENDMENT AND WAIVERS. This Agreement may not be modified, waived or amended unless mutually agreed to in writing by the parties hereto. 27.04. CAPTION REFERENCES AND HEADINGS. All section headings in this Agreement are for convenience or reference only and are not intended to define or limit the scope of any provision of this Agreement. 27.05. SEVERABILITY. If any provision of this Agreement shall be held invalid for any reason, then such provision shall be severed from the remaining provisions of this Agreement and shall not affect the validity or enforceability of the other provisions of this Agreement, unless the invalidity of any such provision deprives any party of the economic benefit intended to be conferred by this Agreement. 27.06. WAIVER. Any waiver by either party of any provision of this Agreement shall not imply a subsequent waiver of that or any other provision, and any failure to enforce strict performance of any provision of this Agreement shall not be construed as a waiver or relinquishment to enforce strict performance in respect to such provision on any future occasion. 11 14 27.07. CONSTRUCTION. Notwithstanding the general rules of construction, both NBSI and Company acknowledge that both parties were given an equal opportunity to negotiate the terms and conditions contained in this Agreement, and agree that the identity of the drafter of this Agreement is not relevant to any interpretation of the terms and conditions of this Agreement. 27.O8. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which when so executed shall be deemed to be an original. EXECUTED this 21st day of January, 1997 NBSI: NATIONSBANC SERVICES, INC. COMPANY: NETWORK SOLUTIONS, INC. BY: /s/BETTY W. LUTHER BY: /s/JAMES M. ULAM ----------------------------------- ------------------------- PRINTED NAME: Betty W. Luther PRINTED NAME: James M. Ulam OFFICER's TITLE: Vice President TITLE: Director of Contracts For more information regarding the negotiation and content of this Agreement, the following persons may be contacted: FOR NBSI: Phyllis A. Warren FOR COMPANY: James M. Ulam 12 15 EXHIBIT A GENERAL CLASSIFICATIONS FOR SERVICES The scope of work will be defined under each Task Order, and will meet one or more of the following general classifications: - - Engineering. Engineering support is defined as Network, Systems, Application, or other Information Technology engineering in which a professionally developed, technically accurate, cost effective, solution or product is delivered to NBSI. - - Technical Studies: Technical Studies is defined as research, reviews, requirements analyses, evaluations, or problem determination and recommendations that are professionally produced and delivered to NBSI. - - Operations Support. Operations Support is defined as network, systems, or platform operations and management in which day-to-day service objectives and cost versus performance are fundamental objectives and potential deliverables to NBSI. - - Project Management. Project Management is defined as professional management of projects or programs where such services as project planning and scheduling, staff supervision, and progress analysis and reporting are fundamental objectives and potential deliverables to NBSI. NBSI will provide, at its cost, connectivity from the NationsBanc LAN/WAN to Company's Charlotte office. This connectivity will facilitate coordination and delivery of project support under this Agreement. 13 16 EXHIBIT B JOB CATEGORIES JOB CATEGORY: NETWORK ANALYST POSITION DESCRIPTION This is an entry level position for network analysis and engineering. The individual must possess a knowledge of network operations functions and demonstrated skills in analysis and diagnosis of network problems. The individual shall be experienced with specialized monitoring and diagnostic equipment and software. The individual may possess skills and training with particular Network Operating Systems (NOS) or network infrastructure support equipment, such as Routers, Switches, and Concentrators. DUTIES RESPONSIBILITIES - - Provide support of the site's physical network, multi-user computer system LANs including backbone network connections and equipment, or desktop software and configurations. - - Troubleshoot problems on the site network, passing on all information, as necessary, to the users of the site network. - - Provide coordination and/or automation of network subscriber requests. - - Provide logistic support to change-control and deployment of new network equipment and software. EMPLOYMENT STANDARDS Individual shall possess an Associates degree or equivalent education and experience plus four years applicable work experience and/or technical training. Knowledge and experience with networks to include LAN/WAN, SNA, and/or telecommunications. 14 17 EXHIBIT B JOB CATEGORIES JOB DESCRIPTION: NETWORK ENGINEER POSITION DESCRIPTION This is an intermediate level position for network analysis and engineering. The individual must possess a basic knowledge of network infrastructure design and modification and demonstrated skills with analysis, formulation, and delivery of moderately complex documentation and specifications including diagrams, technical studies, and cost-benefit analyses in support of their recommendations. The individual shall possess specialized skills and limited experience with particular Network architectures, protocols, and standards. DUTIES AND RESPONSIBILITIES - - Provide technical engineering in support of projects and planning efforts with objective of delivering cost-effective solutions with sound, industry-standard approaches. - - Examine and review designs, processes, standards, and technologies for improvement and innovation, providing appropriate written/oral feed-back and recommendations. - - Assist in third-level network and network application problem analysis and trouble-shooting. EMPLOYMENT STANDARDS Individual shall possess a BA/BS degree or equivalent education and experience plus six years applicable work experience and/or technical training. Knowledge and experience with networks architectures to include LAN/WAN, SNA, and/or telecommunications. Individual must have knowledge of Internet/Intranet technologies. 15 18 EXHIBIT B JOB CATEGORIES JOB DESCRIPTION: NETWORK SPECIALIST POSITION DESCRIPTION This is a journeyman level position for network analysis and engineering. The individual must possess a broad knowledge of network infrastructure design and modification and demonstrated skills with analysis, formulation, and delivery of highly complex documentation and engineering specifications including detailed diagrams, technical studies, and cost-benefit analyses in support of their recommendations. The individual shall possess specialized skills and experience with a broad base of Network architectures, protocols, and standards. DUTIES AND RESPONSIBILITIES - - Provide technical engineering in support of projects and planning efforts with objective of delivering cost-effective solutions with sound, industry-standard approaches. - - Examine and review designs, processes, standards, and technologies for improvement and innovation, providing appropriate written/oral feed-back and recommendations. - - Conduct or assist with major requirements studies and deliver recommendations. - - Provide third-level network and network application problem analysis and trouble-shooting. - - Provide review and guidance on internal network policies and standards, wherever applicable. - - Provide review and guidance for access to external networks including the Internet, to assure adherence to any and all applicable policies and standards. EMPLOYMENT STANDARDS Individual shall possess a BA/BS degree or equivalent education and experience plus six years applicable work experience and/or technical training. Knowledge and experience with networks to include LAN/WAN, SNA, and/or telecommunications. Individual must have knowledge and experience with integration of Internet/Intranet technologies. 16 19 EXHIBIT B JOB CATEGORIES JOB DESCRIPTION: NETWORK CONSULTANT POSITION DESCRIPTION This is a journeyman level position for network consulting. The individual must possess a broad background of knowledge and experience to support integration and optimization of network technologies and applications. The individual possesses a broad base of skills and experience with Network architectures, protocols, and standards. The individual may possess specialized skills in specific industry-standard networking solutions, such as IP-based or SNA Networks. DUTIES AND RESPONSIBILITIES - - Provide technical consulting in support of projects and planning efforts with objective of delivering cost-effective solutions with sound, industry-standard approaches. - - Examine and review designs, processes, standards, and technologies for improvement and innovation, providing appropriate written/oral feed-back and recommendations. - - Independently conduct or lead major requirements studies and deliver recommendations. - - Provide third-level network and network-application problem analysis and trouble-shooting. - - Provide review and guidance on internal network policies and standards, wherever applicable. - - Provide review and guidance for access to external networks including the Internet, to assure adherence to any and all applicable policies and standards. - - Provide project planning and support. EMPLOYMENT STANDARDS Individual shall possess a BA/BS degree or equivalent education and experience plus eight years applicable work experience and/or technical training. An advanced degree is desirable. Knowledge and experience with networks to include LAN/WAN, SNA, and/or telecommunications. Individual must have knowledge and experience with integration of Internet/Intranet technologies. 17 20 EXHIBIT B JOB CATEGORIES JOB DESCRIPTION: ADVISORY NETWORK CONSULTANT POSITION DESCRIPTION This is a senior level position for network consulting. Individuals in this position shall fully participate in complex analysis and design projects. The individual must possess a broad background of knowledge and experience to support integration and optimization of network technologies and applications. The individual shall possess a broad base of skills and experience with Network architectures, protocols, and standards. The individual shall possess specialized skills in one or more specific industry-standard networking solutions, such as IP-based or SNA Networks. DUTIES AND RESPONSIBILITIES - - Provide technical consulting in support of projects and planning efforts with objective of delivering cost-effective solutions with sound, industry-standard approaches. - - Examine and review designs, processes, standards, and technologies for improvement and innovation, providing appropriate written/oral feed-back and recommendations. - - Independently conduct or lead major requirement studies and deliver recommendations. - - Provide third-level network and network-application problem and analysis and trouble-shooting. - - Provide review and guidance for access to external networks including the Internet, to assure adherence to any and all applicable policies and standards. - - Conduct technology studies, reviews, and investigations. - - Provide project planning and support. - - Provide project leadership. EMPLOYMENT STANDARDS Individual shall possess a BA/BS degree or equivalent education and experience plus 10 years applicable work experience and/or technical training. An advanced degree is desirable. Knowledge and experience with networks to include LAN/WAN, SNA, and/or telecommunications. Individual must have knowledge and experience with integration of Internet/Intranet technologies. 18 21 EXIIIBIT B JOB CATEGORIES JOB DESCRIPTION: PRINCIPAL NETWORK CONSULTANT POSITION DESCRIPTION This is a mastery level position for network consulting. The individual shall possess a broad technical and analytical background of knowledge and experience to support integration and optimization of network technologies and applications. The individual shall possess a broad base of skills and experience with consulting services to all areas of the company, including marketing/business acquisition, current client support, technical staff development, and strategic planning. The individual shall be capable of performing independently, as required, and provide team leadership to assigned technical staff members. The individual shall also interact with senior level technical and executive staff; both within Network Solutions and with current potential clients. Individuals in this position are expected to compose and deliver, orally and in writing, reports and presentations of the highest professional quality. DUTIES AND RESPONSIBILITIES - - Provide technical consulting in support of projects and planning efforts with objective of delivering cost-effective solutions with sound, industry-standard approaches. - - Examine and review designs, processes, standards, and technologies for improvement and innovation, providing appropriate written/oral feed-back and recommendations. - - Independently conduct or lead major requirement studies and deliver recommendations. - - Provide third-level network and network-application problem analysis and trouble-shooting. - - Provide review and guidance on internal network policies and standards, wherever applicable. - - Provide review and guidance for access to external networks including the Internet, to assure adherence to any and all applicable policies and standards. - - Conduct technology studies, reviews, and investigations. - - Provide project planning and support. - - Provide project management support. EMPLOYMENT STANDARDS Individual shall possess a BA/BS degree or equivalent education and experience plus ten years applicable work experience and/or technical training. An advanced is desirable. Knowledge and experience with networks to include LAN/WAN, SNA, and/or telecommunications. Individual must have knowledge and experience with integration of Internet/Intranet technologies. 19 22 EXHIBIT C NATIONSBANC MASTER CONTRACT TIME AND MATERIAL/LABOR HOUR RATES
- ------------------------------------------------------------------------------------------------ LABOR CATEGORY DURATION OF LONGER THAN 6 ASSIGNMENT MONTHS 1 HOUR TO 6 MONTHS - ------------------------------------------------------------------------------------------------ PRINCIPAL NETWORK CONSULTANT $173 $138 - -------------------------------------------------------------------------------------- ADVISOR NETWORK CONSULTANT $158 $126 - -------------------------------------------------------------------------------------- NETWORK CONSULTANT $143 $114 - -------------------------------------------------------------------------------------- NETWORK SPECIALIST $124 $99 - ------------------------------------------------------------------------------------- NETWORK ENGINEER $109 $87 - ------------------------------------------------------------------------------------- NETWORK ANALYST $94 $75 - -------------------------------------------------------------------------------------
Subject to Section 19.04 of this Agreement, the above listed rates are valid through December 31, 1999. Material, travel and other direct costs incurred in the performance of the Agreement shall be reimbursed at cost plus a 5% handling fee. Lodging and travel arrangements for Company will be made by NBSI. Task Order modifications which extend the duration of the assignment will not entitle NBSI to a credit or refund resulting from the change in the hourly rate. If a Task Order modification shortens the duration of the assignment so that the effective hourly rate increases, Company is entitled to bill the higher rate from the date of the modification. 20 EX-10.4 7 1996 STOCK INCENTIVE PLAN 1 EXHIBIT 10.4 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN (Adopted Effective September 18, 1996) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.1 Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE 3. SHARES AVAILABLE FOR GRANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.2 Additional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3.3 Dividend Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE 4. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.1 General Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.2 Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4.3 Limits on Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE 5. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5.6 Modification or Assumption of Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 ARTICLE 6. PAYMENT FOR OPTION SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.3 Exercise/Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.4 Exercise/Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.5 Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE 7. STOCK APPRECIATION RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.1 SAR Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.6 Exercise of SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 7.7 Modification or Assumption of SARs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
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Page ---- ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.1 Time, Amount and Form of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.4 Form and Time of Settlement of Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 8.5 Death of Recipient . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 8.6 Creditors' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 9. VOTING AND DIVIDEND RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.1 Restricted Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9.2 Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE 10. PROTECTION AGAINST DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10.2 Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 11. AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.1 Effective Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.2 Elections to Receive NSOs or Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.3 Number and Terms of NSOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12.4 Number and Terms of Stock Units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 13. LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13.3 Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 ARTICLE 14. LIMITATION ON PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14.1 Basic Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 14.2 Reduction of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14.3 Overpayments and Underpayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 14.4 Related Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 ARTICLE 15. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 15.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 16.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
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Page ---- ARTICLE 17. FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 17.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 18. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICLE 19. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-iii- 5 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN (Adopted Effective September 18, 1996) ARTICLE 1. INTRODUCTION. The Plan was adopted by the Board on September 18, 1996, subject to approval by the Company's stockholders. The purpose of the Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging Key Employees to focus on critical long-range objectives, (b) encouraging the attraction and retention of Key Employees with exceptional qualifications and (c) linking Key Employees directly to stockholder interests through increased stock ownership. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares, Stock Units, Options (which may constitute incentive stock options or nonstatutory stock options) or stock appreciation rights. The Plan shall be governed by, and construed in accordance with, the laws of the State of Delaware (except their choice-of-law provisions). ARTICLE 2. ADMINISTRATION. 2.1 Committee Composition. The Plan shall be administered by the Committee. Effective with the Company's initial public offering, the Committee shall consist of two or more directors of the Company who shall satisfy the requirements of Rule 16b-3 (or its successor) under the Exchange Act with respect to the grant of Awards to persons who are officers or directors of the Company under Section 16 of the Exchange Act. The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not qualify under Rule 16b-3, who may administer the Plan with respect to Key Employees who are not considered officers or directors of the Company under Section 16 of the Exchange Act, may grant Awards under the Plan to such Key Employees and may determine all terms of such Awards. 2.2 Committee Responsibilities. The Committee shall: (a) Select the Key Employees who are to receive Awards under the Plan; (b) Determine the type, number, vesting requirements and other features and conditions of such Awards; (c) Interpret the Plan; and -1- 6 (d) Make all other decisions relating to the operation of the Plan. The Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan. The Committee's determinations under the Plan shall be final and binding on all persons. ARTICLE 3. SHARES AVAILABLE FOR GRANTS. 3.1 Basic Limitation. Common Shares issued pursuant to the Plan may be authorized but unissued shares or treasury shares. The aggregate number of Common Shares initially reserved for award under the Plan shall be 2,306,250 shares. Effective January 1, 1997 and on each January 1 thereafter for the remaining term of the Plan, the aggregate number of Common Shares which may be issued under the Plan to individuals shall be increased by a number of Common Shares equal to 2% of the total number of Common Shares of the Company outstanding at the end of the most recently concluded calendar year. Any Common Shares that have been reserved but not issued as Restricted Shares, Share Units, Options or SARs during any calendar year shall remain available for grant during any subsequent calendar year. Notwithstanding the foregoing, no more than 1,000,000 Common Shares shall be available for the grant of ISOs for the remaining term of the Plan. The limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 10. 3.2 Additional Shares. If Stock Units, Options or SARs are forfeited or if Options or SARs terminate for any other reason before being exercised, then the corresponding Common Shares shall again become available for Awards under the Plan. If SARs are exercised, then only the number of Common Shares (if any) actually issued in settlement of such SARs shall reduce the number available under Section 3.1 and the balance shall again become available for Awards under the Plan. If Restricted Shares are forfeited, then such Shares shall again become available for Awards under the Plan. 3.3 Dividend Equivalents. Any dividend equivalents distributed under the Plan shall not be applied against the number of Restricted Shares, Stock Units, Options or SARs available for Awards, whether or not such dividend equivalents are converted into Stock Units. ARTICLE 4. ELIGIBILITY. 4.1 General Rules. Only Key Employees (including, without limitation, independent contractors who are not members of the Board) shall be eligible for designation as Participants by the Committee. All Outside Directors shall be eligible for making an election described in Article 12. 4.2 Incentive Stock Options. Only Key Employees who are common-law employees of the Company, a Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, a Key Employee who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the grant of an ISO unless the requirements set forth in section 422(c)(5) of the Code are satisfied. -2- 7 4.3 Limits on Awards. No Key Employee shall receive Options or SARs to purchase Common Shares during any fiscal year covering in excess of 1,000,000 Common Shares; provided, however, a newly hired Key Employee may receive Options or SARs to purchase up to 1,000,000 Common Shares during the portion of the fiscal year remaining after his or her date of hire. ARTICLE 5. OPTIONS. 5.1 Stock Option Agreement. Each grant of an Option under the Plan shall be evidenced by a Stock Option Agreement between the Optionee and the Company. Such Option shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan, including but not limited to rights of repurchase and rights of first refusal. The Stock Option Agreement shall specify whether the Option is an ISO or an NSO. The provisions of the various Stock Option Agreements entered into under the Plan need not be identical. Options may be granted in consideration of a cash payment or in consideration of a reduction in the Optionee's other compensation. A Stock Option Agreement may provide that new Options will be granted automatically to the Optionee when he or she exercises the prior Options. 5.2 Number of Shares. Each Stock Option Agreement shall specify the number of Common Shares subject to the Option and shall provide for the adjustment of such number in accordance with Article 10. 5.3 Exercise Price. Each Stock Option Agreement shall specify the Exercise Price; provided that the Exercise Price of an ISO shall in no event be less than one hundred percent (100%) of the Fair Market Value of a Common Share on the date of grant. In the case of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the NSO is outstanding. 5.4 Exercisability and Term. Each Stock Option Agreement shall specify the date when all or any installment of the Option is to become exercisable. The Stock Option Agreement shall also specify the term of the Option; provided that the term of an ISO shall in no event exceed ten (10) years from the date of grant. A Stock Option Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. Options may be awarded in combination with SARs, and such an Award may provide that the Options will not be exercisable unless the related SARs are forfeited. NSOs may also be awarded in combination with Restricted Shares or Stock Units, and such an Award may provide that the NSOs will not be exercisable unless the related Restricted Shares or Stock Units are forfeited. 5.5 Effect of Change in Control. The Committee may determine, at the time of granting an Option or thereafter, that such Option shall become fully exercisable as to all Common Shares subject to such Option in the event that a Change in Control occurs with respect to the Company. -3- 8 5.6 Modification or Assumption of Options. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding options or may accept the cancellation of outstanding options (whether granted by the Company or by another issuer) in return for the grant of new options for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such Option. ARTICLE 6. PAYMENT FOR OPTION SHARES. 6.1 General Rule. The entire Exercise Price for the Common Shares issued upon exercise of Options shall be payable in cash at the time when such Common Shares are purchased, except as follows: (a) In the case of an ISO granted under the Plan, payment shall be made only pursuant to the express provisions of the applicable Stock Option Agreement. The Stock Option Agreement may specify that payment may be made in any form(s) described in this Article 6. (b) In the case of an NSO, the Committee may at any time accept payment in any form(s) described in this Article 6. 6.2 Surrender of Stock. To the extent that this Section 6.2 is applicable, payment for all or any part of the Exercise Price may be made with Common Shares which have already been owned by the Optionee for such duration as shall be specified by the Committee. Such Common Shares shall be valued at their Fair Market Value on the date when the new Common Shares are purchased under the Plan. 6.3 Exercise/Sale. To the extent that this Section 6.3 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to a securities broker approved by the Company to sell Common Shares and to deliver all or part of the sales proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.4 Exercise/Pledge. To the extent that this Section 6.4 is applicable, payment may be made by the delivery (on a form prescribed by the Company) of an irrevocable direction to pledge Common Shares to a securities broker or lender approved by the Company, as security for a loan, and to deliver all or part of the loan proceeds to the Company in payment of all or part of the Exercise Price and any withholding taxes. 6.5 Promissory Note. To the extent that this Section 6.5 is applicable, payment may be made with a full-recourse promissory note; provided that to the extent required by applicable law, the par value of the Common Shares shall be paid in cash. 6.6 Other Forms of Payment. To the extent that this Section 6.6 is applicable, payment may be made in any other form that is consistent with applicable laws, regulations and rules. -4- 9 ARTICLE 7. STOCK APPRECIATION RIGHTS. 7.1 SAR Agreement. Each grant of a SAR under the Plan shall be evidenced by a SAR Agreement between the Optionee and the Company. Such SAR shall be subject to all applicable terms of the Plan and may be subject to any other terms that are not inconsistent with the Plan. The provisions of the various SAR Agreements entered into under the Plan need not be identical. SARs may be granted in consideration of a reduction in the Optionee's other compensation. 7.2 Number of Shares. Each SAR Agreement shall specify the number of Common Shares to which the SAR pertains and shall provide for the adjustment of such number in accordance with Article 10. 7.3 Exercise Price. Each SAR Agreement shall specify the Exercise Price. A SAR Agreement may specify an Exercise Price that varies in accordance with a predetermined formula while the SAR is outstanding. 7.4 Exercisability and Term. Each SAR Agreement shall specify the date when all or any installment of the SAR is to become exercisable. The SAR Agreement shall also specify the term of the SAR. A SAR Agreement may provide for accelerated exercisability in the event of the Optionee's death, disability or retirement or other events and may provide for expiration prior to the end of its term in the event of the termination of the Optionee's service. SARs may also be awarded in combination with Options, Restricted Shares or Stock Units, and such an Award may provide that the SARs will not be exercisable unless the related Options, Restricted Shares or Stock Units are forfeited. A SAR may be included in an ISO only at the time of grant but may be included in an NSO at the time of grant or thereafter. A SAR granted under the Plan may provide that it will be exercisable only in the event of a Change in Control. 7.5 Effect of Change in Control. The Committee may determine, at the time of granting a SAR or thereafter, that such SAR shall become fully exercisable as to all Common Shares subject to such SAR in the event that a Change in Control occurs with respect to the Company. 7.6 Exercise of SARs. If, on the date when a SAR expires, the Exercise Price under such SAR is less than the Fair Market Value on such date but any portion of such SAR has not been exercised or surrendered, then such SAR shall automatically be deemed to be exercised as of such date with respect to such portion. Upon exercise of a SAR, the Optionee (or any person having the right to exercise the SAR after his or her death) shall receive from the Company (a) Common Shares, (b) cash or (c) a combination of Common Shares and cash, as the Committee shall determine. The amount of cash and/or the Fair Market Value of Common Shares received upon exercise of SARs shall, in the aggregate, be equal to the amount by which the Fair Market Value (on the date of surrender) of the Common Shares subject to the SARs exceeds the Exercise Price. -5- 10 7.7 Modification or Assumption of SARs. Within the limitations of the Plan, the Committee may modify, extend or assume outstanding SARs or may accept the cancellation of outstanding SARs (whether granted by the Company or by another issuer) in return for the grant of new SARs for the same or a different number of shares and at the same or a different exercise price. The foregoing notwithstanding, no modification of a SAR shall, without the consent of the Optionee, alter or impair his or her rights or obligations under such SAR. ARTICLE 8. RESTRICTED SHARES AND STOCK UNITS. 8.1 Time, Amount and Form of Awards. Awards under the Plan may be granted in the form of Restricted Shares, in the form of Stock Units, or in any combination of both. Restricted Shares or Stock Units may also be awarded in combination with NSOs or SARs, and such an Award may provide that the Restricted Shares or Stock Units will be forfeited in the event that the related NSOs or SARs are exercised. 8.2 Payment for Awards. To the extent that an Award is granted in the form of newly issued Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be required to pay the Company in cash an amount equal to the par value of such Restricted Shares. To the extent that an Award is granted in the form of Restricted Shares from the Company's treasury or in the form of Stock Units, no cash consideration shall be required of the Award recipients. 8.3 Vesting Conditions. Each Award of Restricted Shares or Stock Units shall become vested, in full or in installments, upon satisfaction of the conditions specified in the Stock Award Agreement which may include performance conditions. A Stock Award Agreement may provide for accelerated vesting in the event of the Participant's death, disability or retirement or other events. The Committee may determine, at the time of making an Award or thereafter, that such Award shall become fully vested in the event that a Change in Control occurs with respect to the Company. 8.4 Form and Time of Settlement of Stock Units. Settlement of vested Stock Units may be made in the form of (a) cash, (b) Common Shares or (c) any combination of both. The actual number of Stock Units eligible for settlement may be larger or smaller than the number included in the original Award, based on predetermined performance factors. Methods of converting Stock Units into cash may include (without limitation) a method based on the average Fair Market Value of Common Shares over a series of trading days. Vested Stock Units may be settled in a lump sum or in installments. The distribution may occur or commence when all vesting conditions applicable to the Stock Units have been satisfied or have lapsed, or it may be deferred to any later date. The amount of a deferred distribution may be increased by an interest factor or by dividend equivalents. Until an Award of Stock Units is settled, the number of such Stock Units shall be subject to adjustment pursuant to Article 10. 8.5 Death of Recipient. Any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's beneficiary or beneficiaries. Each recipient of a Stock Units Award under the Plan shall designate one or more beneficiaries -6- 11 for this purpose by filing the prescribed form with the Company. A beneficiary designation may be changed by filing the prescribed form with the Company at any time before the Award recipient's death. If no beneficiary was designated or if no designated beneficiary survives the Award recipient, then any Stock Units Award that becomes payable after the recipient's death shall be distributed to the recipient's estate. 8.6 Creditors' Rights. A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Stock Award Agreement. ARTICLE 9. VOTING AND DIVIDEND RIGHTS. 9.1 Restricted Shares. The holders of Restricted Shares awarded under the Plan shall have the same voting, dividend and other rights as the Company's other stockholders. A Stock Award Agreement, however, may require that the holders of Restricted Shares invest any cash dividends received in additional Restricted Shares. Such additional Restricted Shares shall be subject to the same conditions and restrictions as the Award with respect to which the dividends were paid. Such additional Restricted Shares shall not reduce the number of Common Shares available under Article 3. 9.2 Stock Units. The holders of Stock Units shall have no voting rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan may, at the Committee's discretion, carry with it a right to dividend equivalents. Such right entitles the holder to be credited with an amount equal to all cash dividends paid on one Common Share while the Stock Unit is outstanding. Dividend equivalents may be converted into additional Stock Units. Settlement of dividend equivalents may be made in the form of cash, in the form of Common Shares, or in a combination of both. Prior to distribution, any dividend equivalents which are not paid shall be subject to the same conditions and restrictions as the Stock Units to which they attach. ARTICLE 10. PROTECTION AGAINST DILUTION. 10.1 Adjustments. In the event of a subdivision of the outstanding Common Shares, a declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a form other than Common Shares in an amount that has a material effect on the price of Common Shares, a combination or consolidation of the outstanding Common Shares (by reclassification or otherwise) into a lesser number of Common Shares, a recapitalization, a spinoff or a similar occurrence, the Committee shall make such adjustments as it, in its sole discretion, deems appropriate in one or more of: (a) The number of Options, SARs, Restricted Shares and Stock Units available for future Awards under Article 3; (b) The number of Stock Units included in any prior Award which has not yet been settled; -7- 12 (c) The number of Common Shares covered by each outstanding Option and SAR; or (d) The Exercise Price under each outstanding Option and SAR. Except as provided in this Article 10, a Participant shall have no rights by reason of any issue by the Company of stock of any class or securities convertible into stock of any class, any subdivision or consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class. 10.2 Reorganizations. In the event that the Company is a party to a merger or other reorganization, outstanding Options, SARs, Restricted Shares and Stock Units shall be subject to the agreement of merger or reorganization. Such agreement may provide, without limitation, for the assumption of outstanding Awards by the surviving corporation or its parent, for their continuation by the Company (if the Company is a surviving corporation), for accelerated vesting and accelerated expiration, or for settlement in cash. ARTICLE 11. AWARDS UNDER OTHER PLANS. The Company may grant awards under other plans or programs. Such awards may be settled in the form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes under the Plan like Common Shares issued in settlement of Stock Units and shall, when issued, reduce the number of Common Shares available under Article 3. ARTICLE 12. PAYMENT OF DIRECTOR'S FEES IN SECURITIES. 12.1 Effective Date. No provision of this Article 12 shall be effective unless and until the Board has determined to implement such provision. 12.2 Elections to Receive NSOs or Stock Units. An Outside Director may elect to receive his or her annual retainer payments and meeting fees from the Company in the form of cash, NSOs, Stock Units, or a combination thereof. Such NSOs and Stock Units shall be issued under the Plan. An election under this Article 12 shall be filed with the Company on the prescribed form and subject to such filing deadlines and election procedures as shall be established by the Committee. 12.3 Number and Terms of NSOs. The number of NSOs to be granted to Outside Directors in lieu of annual retainers and meeting fees that would otherwise be paid in cash shall be calculated in a manner determined by the Board. The terms of such NSOs shall also be determined by the Board. 12.4 Number and Terms of Stock Units. The number of Stock Units to be granted to Outside Directors shall be calculated by dividing the amount of the annual retainer or the meeting fee that would otherwise be paid in cash by the arithmetic mean of the Fair Market Values of a Common Share on the ten (10) consecutive trading days ending with the date -8- 13 when such retainer or fee is payable. The terms of such Stock Units shall be determined by the Board. ARTICLE 13. LIMITATION ON RIGHTS. 13.1 Retention Rights. Neither the Plan nor any Award granted under the Plan shall be deemed to give any individual a right to remain an employee, consultant or director of the Company, a Parent or a Subsidiary. The Company and its Parents and Subsidiaries reserve the right to terminate the service of any employee, consultant or director at any time, with or without cause, subject to applicable laws, the Company's certificate of incorporation and by-laws and a written employment agreement (if any). 13.2 Stockholders' Rights. A Participant shall have no dividend rights, voting rights or other rights as a stockholder with respect to any Common Shares covered by his or her Award prior to the issuance of a stock certificate for such Common Shares. No adjustment shall be made for cash dividends or other rights for which the record date is prior to the date when such certificate is issued, except as expressly provided in Articles 8, 9 and 10. 13.3 Regulatory Requirements. Any other provision of the Plan notwithstanding, the obligation of the Company to issue Common Shares under the Plan shall be subject to all applicable laws, rules and regulations and such approval by any regulatory body as may be required. The Company reserves the right to restrict, in whole or in part, the delivery of Common Shares pursuant to any Award prior to the satisfaction of all legal requirements relating to the issuance of such Common Shares, to their registration, qualification or listing or to an exemption from registration, qualification or listing. ARTICLE 14. LIMITATION ON PAYMENTS. 14.1 Basic Rule. Any provision of the Plan to the contrary notwithstanding, in the event that the independent auditors most recently selected by the Board (the "Auditors") determine that any payment or transfer by the Company under the Plan to or for the benefit of a Participant (a "Payment") would be nondeductible by the Company for federal income tax purposes because of the provisions concerning "excess parachute payments" in section 280G of the Code, then the aggregate present value of all Payments shall be reduced (but not below zero) to the Reduced Amount; provided that the Committee, at the time of making an Award under this Plan or at any time thereafter, may specify in writing that such Award shall not be so reduced and shall not be subject to this Article 14. For purposes of this Article 14, the "Reduced Amount" shall be the amount, expressed as a present value, which maximizes the aggregate present value of the Payments without causing any Payment to be nondeductible by the Company because of section 280G of the Code. 14.2 Reduction of Payments. If the Auditors determine that any Payment would be nondeductible by the Company because of section 280G of the Code, then the Company shall promptly give the Participant notice to that effect and a copy of the detailed calculation thereof and of the Reduced Amount, and the Participant may then elect, in his or her sole discretion, which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) -9- 14 and shall advise the Company in writing of his or her election within ten (10) days of receipt of notice. If no such election is made by the Participant within such ten (10) day period, then the Company may elect which and how much of the Payments shall be eliminated or reduced (as long as after such election the aggregate present value of the Payments equals the Reduced Amount) and shall notify the Participant promptly of such election. For purposes of this Article 14, present value shall be determined in accordance with section 280G(d)(4) of the Code. All determinations made by the Auditors under this Article 14 shall be binding upon the Company and the Participant and shall be made within sixty (60) days of the date when a Payment becomes payable or transferable. As promptly as practicable following such determination and the elections hereunder, the Company shall pay or transfer to or for the benefit of the Participant such amounts as are then due to him or her under the Plan and shall promptly pay or transfer to or for the benefit of the Participant in the future such amounts as become due to him or her under the Plan. 14.3 Overpayments and Underpayments. As a result of uncertainty in the application of section 280G of the Code at the time of an initial determination by the Auditors hereunder, it is possible that Payments will have been made by the Company which should not have been made (an "Overpayment") or that additional Payments which will not have been made by the Company could have been made (an "Underpayment"), consistent in each case with the calculation of the Reduced Amount hereunder. In the event that the Auditors, based upon the assertion of a deficiency by the Internal Revenue Service against the Company or the Participant which the Auditors believe has a high probability of success, determine that an Overpayment has been made, such Overpayment shall be treated for all purposes as a loan to the Participant which he or she shall repay to the Company, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code; provided, however, that no amount shall be payable by the Participant to the Company if and to the extent that such payment would not reduce the amount which is subject to taxation under section 4999 of the Code. In the event that the Auditors determine that an Underpayment has occurred, such Underpayment shall promptly be paid or transferred by the Company to or for the benefit of the Participant, together with interest at the applicable federal rate provided in section 7872(f)(2) of the Code. 14.4 Related Corporations. For purposes of this Article 14, the term "Company" shall include affiliated corporations to the extent determined by the Auditors in accordance with section 280G(d)(5) of the Code. ARTICLE 15. WITHHOLDING TAXES. 15.1 General. To the extent required by applicable federal, state, local or foreign law, a Participant or his or her successor shall make arrangements satisfactory to the Company for the satisfaction of any withholding tax obligations that arise in connection with the Plan. The Company shall not be required to issue any Common Shares or make any cash payment under the Plan until such obligations are satisfied. 15.2 Share Withholding. A Participant may satisfy all or part of his or her withholding or income tax obligations by having the Company withhold all or a portion of any Common Shares that otherwise would be issued to him or her or by surrendering all or -10- 15 a portion of any Common Shares that he or she previously acquired. Such Common Shares shall be valued at their Fair Market Value on the date when taxes otherwise would be withheld in cash. Any payment of taxes by assigning Common Shares to the Company may be subject to restrictions. ARTICLE 16. ASSIGNMENT OR TRANSFER OF AWARDS. 16.1 General. Except as provided in Article 15 or the Award agreement, an Award granted under the Plan shall not be anticipated, assigned, attached, garnished, optioned, transferred or made subject to any creditor's process, whether voluntarily, involuntarily or by operation of law. Except as provided in the Award agreement, an Option or SAR may be exercised during the lifetime of the Optionee only by him or her or by his or her guardian or legal representative. This Article 16 shall not preclude a Participant from designating a beneficiary who will receive any outstanding Awards in the event of the Participant's death, nor shall it preclude a transfer of Awards by will or by the laws of descent and distribution. ARTICLE 17. FUTURE OF THE PLAN. 17.1 Term of the Plan. The Plan, as set forth herein, shall become effective on September 18, 1996, subject to the approval of the Company's stockholders within twelve (12) months of September 18, 1996. The Plan shall remain in effect until it is terminated under Section 17.2, except that no ISOs shall be granted after September 17, 2006. 17.2 Amendment or Termination. The Board may, at any time and for any reason, amend or terminate the Plan. An amendment of the Plan shall be subject to the approval of the Company's stockholders only to the extent required by applicable laws, regulations or rules. No Awards shall be granted under the Plan after the termination thereof. The termination of the Plan, or any amendment thereof, shall not affect any Award previously granted under the Plan. ARTICLE 18. DEFINITIONS. 18.1 "Award" means any award of an Option, an SAR, a Restricted Share or a Stock Unit under the Plan. 18.2 "Board" means the Company's Board of Directors, as constituted from time to time. 18.3 "Change in Control" shall be deemed to occur upon any "person" (as defined in Section 13(d) of the Exchange Act), other than the Company, its Parent or Subsidiary or employee benefit plan or trust maintained by the Company, its Parent or Subsidiary, becoming the "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, of more than 25% of the Common Shares of the Company outstanding at such time, without the prior approval of the Board. 18.4 "Code" means the Internal Revenue Code of 1986, as amended. -11- 16 18.5 "Committee" means a committee of the Board, as described in Article 2. 18.6 "Common Share" means one share of the common stock of the Company. 18.7 "Company" means Network Solutions, Inc., a Delaware corporation, or its successor. 18.8 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 18.9 "Exercise Price," in the case of an Option, means the amount for which one Common Share may be purchased upon exercise of such Option, as specified in the applicable Stock Option Agreement. "Exercise Price," in the case of an SAR, means an amount, as specified in the applicable SAR Agreement, which is subtracted from the Fair Market Value of one Common Share in determining the amount payable upon exercise of such SAR. 18.10 "Fair Market Value" means the market price of Common Shares, determined by the Committee as follows: (a) If the Common Shares were traded over-the-counter on the date in question but were not classified as a national market issue, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted by the Nasdaq system for such date; (b) If the Common Shares were traded over-the-counter on the date in question and were classified as a national market issue, then the Fair Market Value shall be equal to the last-transaction price quoted by the Nasdaq system for such date; (c) If the Common Shares were traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and (d) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by independent appraisals or as otherwise determined by the Committee in good faith on such basis as it deems appropriate. Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in the Western Edition of The Wall Street Journal. Such determination shall be conclusive and binding on all persons. 18.11 "ISO" means an incentive stock option described in section 422(b) of the Code. -12- 17 18.12 "Key Employee" means (a) a common-law employee of the Company, a Parent or a Subsidiary, (b) an Outside Director and (c) a consultant or adviser who provides services to the Company, a Parent or a Subsidiary as an independent contractor. 18.13 "NSO" means a stock option not described in sections 422 or 423 of the Code. 18.14 "Option" means an ISO or NSO granted under the Plan and entitling the holder to purchase one Common Share. 18.15 "Optionee" means an individual or estate who holds an Option or SAR. 18.16 "Outside Director" shall mean a member of the Board who is not a common-law employee of the Company, a Parent or a Subsidiary. 18.17 "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Parent on a date after the adoption of the Plan shall be considered a Parent commencing as of such date. 18.18 "Participant" means an individual or estate who holds an Award. 18.19 "Plan" means the Network Solutions, Inc. 1996 Stock Incentive Plan, as amended from time to time. 18.20 "Restricted Share" means a Common Share awarded under the Plan. 18.21 "SAR" means a stock appreciation right granted under the Plan. 18.22 "SAR Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her SAR. 18.23 "Stock Award Agreement" means the agreement between the Company and the recipient of a Restricted Share or Stock Unit which contains the terms, conditions and restrictions pertaining to such Restricted Share or Stock Unit. 18.24 "Stock Option Agreement" means the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to his or her Option. 18.25 "Stock Unit" means a bookkeeping entry representing the equivalent of one Common Share, as awarded under the Plan. 18.26 "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing fifty percent (50%) or more of -13- 18 the total combined voting power of all classes of stock in one of the other corporations in such chain. A corporation that attains the status of a Subsidiary on a date after the adoption of the Plan shall be considered a Subsidiary commencing as of such date. ARTICLE 19. EXECUTION. To record the adoption of the Plan by the Board, the Company has caused its duly authorized officer to affix the corporate name and seal hereto. NETWORK SOLUTIONS, INC. By /s/ DONALD N. TELAGE ------------------------------- Its President ------------------------------ -14- 19 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT Network Solutions, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its common stock to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 1996 Stock Incentive Plan (the "Plan"). Date of Grant: --------------------------------------------------------------- Name of Optionee: ------------------------------------------------------------ Optionee's Social Security Number: ------------------------------------------- Number of Common Shares Covered by Option: ----------------------------------- Exercise Price per Common Share: $ -------------------------------------------- Vesting Start Date: ---------------------------------------------------------- BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THEPLAN, A COPY OF WHICH IS ALSO ATTACHED. Optionee: -------------------------------------------------------------- (Signature) Company: -------------------------------------------------------------- (Signature) Title: ------------------------------------------------------ -1- 20 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN NONSTATUTORY STOCK OPTION AGREEMENT NONSTATUTORY STOCK OPTION This Option is not intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this Option vests over a four year period beginning one year after the Vesting Start Date as shown on the cover sheet. This Option vests at a rate of 30%, 30%, 20% and 20%, respectively, of the Common Shares covered by the Option at the end of the first, second, third and fourth year, respectively, after the Vesting Start Date. The number of Common Shares which may be purchased under this Option by you at the Exercise Price shall be rounded to the nearest whole number. No additional Common Shares will vest after your service has terminated for any reason. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the fifth anniversary of the Date of Grant, as shown on the cover sheet. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service terminates for any reason except death or Disability, your Option will expire at the close of business at Company headquarters on the 30th day after your termination date. During such 30-day period, you may exercise that portion of your Option that was vested on your termination date. DEATH If you die while in service with the Company, your Option will expire at the close of business at Company headquarters on the date 12 months after the date of death. During that 12-month period, your beneficiary, estate or heirs may exercise that portion of your Option that was vested on your date of death. DISABILITY If your service terminates because of your Disability, your Option will expire at the close of business at Company headquarters on the date 90 days after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on your date of Disability. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. -2- 21 LEAVES OF ABSENCE For purposes of this Option, your service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. The Committee determines which leaves count for this purpose, and when your service terminates for all purposes under the Plan and this Agreement. The Committee shall also determine the extent to which you may exercise the vested portion of your Option during a leave of absence. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Committee by filing the proper "Notice of Exercise" form at the address given on the form. Your Notice must specify how many Common Shares you wish to purchase. Your Notice must also specify how your Common Shares should be registered (in your name only, in your and your spouse's names as community property or as joint tenants with right of survivorship or in a trust for your benefit). The Notice will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, that person must prove to the Committee's satisfaction that he or she is entitled to do so. FORM OF PAYMENT When you submit your Notice of Exercise, you must include payment of the Exercise Price for the Common Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - Common Shares which have already been owned by you for more than six months and which are surrendered to the Company. The value of the Common Shares, determined as of the effective date of the Option exercise, will be applied to the Exercise Price. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Common Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the option exercise or the sale of Common Shares acquired upon exercise of this Option. -3- 22 RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws, regulations or Company or underwriter trading policies prohibit a sale. For example, prior to an initial public offering, the Company may, in its sole discretion, restrict the transfer of shares for up to six months from the date of exercise. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares without the prior written consent of the Company or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Company or such underwriters. In order to enforce the provisions of this paragraph, the Company may impose stop-transfer instructions with respect to the shares. You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. -4- 23 THE COMPANY'S RIGHT OF In the event that you propose to sell, pledge or FIRST REFUSAL otherwise transfer to a third party any Common Shares acquired under this Agreement, or any interest in such Common Shares, the Company shall have the "Right of First Refusal" with respect to all (and not less than all) of such Common Shares. If you desire to transfer Common Shares acquired under this Agreement, you must give a written "Transfer Notice" to the Committee describing fully the proposed transfer, including the number of Common Shares proposed to be transferred, the proposed transfer price and the name and address of the proposed transferee. The Transfer Notice shall be signed both by you and by the proposed transferee and must constitute a binding commitment of both parties to the transfer of the Common Shares. The Company shall have the right to purchase all, and not less than all, of the Common Shares on the terms described in the Transfer Notice (subject, however, to any change in such terms permitted in the next paragraph) by delivery of a notice of exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Committee. The Company's rights under this Subsection shall be freely assignable, in whole or in part. If the Company fails to exercise its Right of First Refusal within 30 days after the date when the Committee received the Transfer Notice, you may, not later than 90 days following receipt of the Transfer Notice by the Company, conclude a transfer of the Common Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by you, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in the paragraph above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Common Shares on the terms set forth in the Transfer Notice within 60 days after the date when the Committee received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Common Shares was to be made in a form other than lawful money paid at the time of transfer, the Company shall have the option of paying for the Common Shares with lawful money equal to the present value of the consideration described in the Transfer Notice. -5- 24 The Company's Right of First Refusal shall inure to the benefit of its successors and assigns and shall be binding upon any transferee of the Common Shares. The Company's Right of First Refusal shall terminate in the event that Common Shares are listed or traded on an established stock exchange. RIGHT OF REPURCHASE The Company shall have the right to purchase all of those Common Shares that you have or will acquire under this Option at any time and in its sole discretion. If the Company exercises its right to purchase such Common Shares, the Company will consummate the purchase of such Common Shares within 60 days of the date of its written notice to you. The purchase price for any Common Shares repurchased shall be the Fair Market Value of such Common Shares on the date of purchase and shall be paid in cash. The Company's right of repurchase shall terminate in the event that Common Shares are listed or traded on an established stock exchange. TRANSFER OF OPTION Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option by beneficiary designation or in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a Notice of Exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your Option in any other way. RETENTION RIGHTS This Agreement does not give you the right to be retained by the Company in any capacity. The Company reserves the right to terminate your service at any time and for any reason. STOCKHOLDERS RIGHTS You, or your estate or heirs, have no rights as a stockholder of the Company until a certificate for the Common Shares acquired upon exercise of this Option has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. -6- 25 ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Common Shares, the number of Common Shares covered by this Option and the Exercise Price per share may be adjusted pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. LEGENDS All certificates representing the Common Shares issued upon exercise of this Option shall, where applicable, have endorsed thereon the following legends: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice of law provisions). THE PLAN AND OTHER The text of the Plan is incorporated in this AGREEMENTS Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -7- 26 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT Network Solutions, Inc., a Delaware corporation (the "Company"), hereby grants an Option to purchase shares of its common stock to the Optionee named below. The terms and conditions of the Option are set forth in this cover sheet, in the attachment and in the Company's 1996 Stock Incentive Plan (the "Plan"). Date of Grant: --------------------------------------------------------------- Name of Optionee: ------------------------------------------------------------ Optionee's Social Security Number: ------------------------------------------- Number of Common Shares Covered by Option: ----------------------------------- Exercise Price per Common Share: $ -------------------------------------------- [must be at least 100% fair market value on Date of Grant] Vesting Start Date: ---------------------------------------------------------- Check here if Optionee is a 10% owner (so that exercise price must be 110% of fair market value and term will not exceed 5 years). BY SIGNING THIS COVER SHEET, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED IN THE ATTACHED AGREEMENT AND IN THE PLAN, A COPY OF WHICH IS ALSO ATTACHED. Optionee: -------------------------------------------------------------- (Signature) Company: -------------------------------------------------------------- (Signature) Title: ------------------------------------------------------ -1- 27 NETWORK SOLUTIONS, INC. 1996 STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT INCENTIVE STOCK OPTION This Option is intended to be an incentive stock option under section 422 of the Internal Revenue Code and will be interpreted accordingly. VESTING Your right to exercise this Option vests annually over a four year period beginning one year after the Vesting Start Date as shown on the cover sheet. This Option vests at a rate of 30%, 30%, 20% and 20%, respectively, of the Common Shares covered by the Option at the end of the first, second, third and fourth year, respectively, after the Vesting Start Date. The number of Common Shares which may be purchased under this Option by you at the Exercise Price shall be rounded to the nearest whole number. No additional Common Shares will vest after your service has terminated for any reason. TERM Your Option will expire in any event at the close of business at Company headquarters on the day before the fifth anniversary of the Date of Grant, as shown on the cover sheet. (It will expire earlier if your service terminates, as described below.) REGULAR TERMINATION If your service terminates for any reason except death or Disability, your Option will expire at the close of business at Company headquarters on the 30th day after your termination date. During that 30-day period, you may exercise that portion of your Option that was vested on your termination date. DEATH If you die while in service with the Company, your Option will expire at the close of business at Company headquarters on the date 12 months after the date of death. During that 12-month period, your beneficiary, estate or heirs may exercise that portion of your Option that was vested on your date death. -2- 28 DISABILITY If your service terminates because of your Disability, your Option will expire at the close of business at Company headquarters on the date 90 days after your termination date. During such 90-day period, you may exercise that portion of your Option that was vested on the date of your Disability. "Disability" means that you are unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment. LEAVES OF ABSENCE For purposes of this Option, your service does not terminate when you go on a bona fide leave of absence that was approved by the Company in writing, if the terms of the leave provide for continued service crediting, or when continued service crediting is required by applicable law. However, for purposes of this Option being treated as an ISO, your service will be treated as terminating 90 days after you went on leave, unless your right to return to active work is guaranteed by law or by a contract. Your service terminates in any event when the approved leave ends unless you immediately return to active work. The Committee determines which leaves count for this purpose, and when your service terminates for all purposes under the Plan and this Agreement. The Committee shall also determine the extent to which you may exercise the vested portion of your Option during a leave of absence. NOTICE OF EXERCISE When you wish to exercise this Option, you must notify the Committee by filing the proper "Notice of Exercise" form at the address given on the form. Your Notice must specify how many Common Shares you wish to purchase. Your Notice must also specify how your Common Shares should be registered (in your name only, in your and your spouse's names as community property or as joint tenants with right of survivorship or in a trust for your benefit). The Notice will be effective when it is received by the Committee. If someone else wants to exercise this Option after your death, that person must prove to the Committee's satisfaction that he or she is entitled to do so. -3- 29 FORM OF PAYMENT When you submit your Notice of Exercise, you must include payment of the Exercise Price for the Common Shares you are purchasing. Payment may be made in one (or a combination) of the following forms: - Your personal check, a cashier's check or a money order. - Common Shares which have already been owned by you for more than six months and which are surrendered to the Company. The value of the Common Shares, determined as of the effective date of the option exercise, will be applied to the Exercise Price. - By delivery (on a form prescribed by the Committee) of an irrevocable direction to a securities broker to sell Common Shares and to deliver all or part of the sale proceeds to the Company in payment of the aggregate Exercise Price. WITHHOLDING TAXES You will not be allowed to exercise this Option unless you make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the Option exercise or the sale of Common Shares acquired upon exercise of this Option. RESTRICTIONS ON RESALE By signing this Agreement, you agree not to sell any option Shares at a time when applicable laws, regulations or Company or underwriter trading policies prohibit a sale. For example, prior to an initial public offering, the Company may, in its sole discretion, restrict the transfer of shares for up to six months from the date of exercise. In connection with any underwritten public offering by the Company of its equity securities pursuant to an effective registration statement filed under the Securities Act, including the Company's initial public offering, you agree not to sell, make any short sale of, loan, hypothecate, pledge, grant any option for the purchase of, or otherwise dispose or transfer for value or agree to engage in any of the foregoing transactions with respect to any shares without the prior written consent of the Company or its underwriters, for such period of time after the effective date of such registration statement as may be requested by the Company or such underwriters. In order to enforce the provisions of this paragraph, the Company may impose stop-transfer instructions with respect to the shares. -4- 30 You represent and agree that the Shares to be acquired upon exercising this option will be acquired for investment, and not with a view to the sale or distribution thereof. In the event that the sale of Shares under the Plan is not registered under the Securities Act but an exemption is available which requires an investment representation or other representation, you shall represent and agree at the time of exercise that the Shares being acquired upon exercising this option are being acquired for investment, and not with a view to the sale or distribution thereof, and shall make such other representations as are deemed necessary or appropriate by the Company and its counsel. THE COMPANY'S RIGHT OF In the event that you propose to sell, pledge or FIRST REFUSAL otherwise transfer to a third party any Common Shares acquired under this Agreement, or any interest in such Common Shares, the Company shall have the "Right of First Refusal" with respect to all (and not less than all) of such Common Shares. If you desire to transfer Common Shares acquired under this Agreement, you must give a written "Transfer Notice" to the Committee describing fully the proposed transfer, including the number of Shares proposed to be transferred, the proposed transfer price and the name and address of the proposed transferee. The Transfer Notice shall be signed both by you and by the proposed transferee and must constitute a binding commitment of both parties to the transfer of the Common Shares. The Company shall have the right to purchase all, and not less than all, of the Common Shares on the terms described in the Transfer Notice (subject, however, to any change in such terms permitted in the next paragraph) by delivery of a Notice of Exercise of the Right of First Refusal within 30 days after the date when the Transfer Notice was received by the Committee. The Company's rights under this Subsection shall be freely assignable, in whole or in part. -5- 31 If the Company fails to exercise its Right of First Refusal within 30 days after the date when the Committee received the Transfer Notice, you may, not later than 90 days following receipt of the Transfer Notice by the Committee, conclude a transfer of the Common Shares subject to the Transfer Notice on the terms and conditions described in the Transfer Notice. Any proposed transfer on terms and conditions different from those described in the Transfer Notice, as well as any subsequent proposed transfer by you, shall again be subject to the Right of First Refusal and shall require compliance with the procedure described in the paragraph above. If the Company exercises its Right of First Refusal, the parties shall consummate the sale of the Shares on the terms set forth in the Transfer Notice within 60 days after the date the Committee received the Transfer Notice (or within such longer period as may have been specified in the Transfer Notice); provided, however, that in the event the Transfer Notice provided that payment for the Common Shares was to be made in a form other than lawful money paid at the time of transfer, the Company shall have the option of paying for the Common Shares with lawful money equal to the present value of the consideration described in the Transfer Notice. The Company's Right of First Refusal shall inure to the benefit of its successors and assigns and shall be binding upon any transferee of the Common Shares. The Company's Right of First Refusal shall terminate in the event that Common Shares are listed or traded on an established stock exchange. RIGHT OF REPURCHASE The Company shall have the right to purchase all of those Common Shares that you have or will acquire under this Option at any time and in its sole discretion. If the Company exercises its right to purchase such Common Shares, the Company will consummate the purchase of such Common Shares within 60 days of the date of its written notice to you. The purchase price for any Common Shares repurchased shall be the Fair Market Value of such Common Shares on the date of purchase and shall be paid in cash. The Company's right of repurchase shall terminate in the event that Common Shares are listed or traded on an established stock exchange. -6- 32 TRANSFER OF OPTION Prior to your death, only you may exercise this Option. You cannot transfer or assign this Option. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may, however, dispose of this Option by beneficiary designation or in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a Notice of Exercise from your spouse or former spouse, nor is the Company obligated to recognize such individual's interest in your Option in any other way. RETENTION RIGHTS This Agreement does not give you the right to be retained by the Company in any capacity. The Company reserves the right to terminate your service at any time and for any reason. STOCKHOLDER RIGHTS You, or your beneficiary, estate or heirs, have no rights as a stockholder of the Company until a certificate for the Common Shares acquired upon exercise of this Option has been issued. No adjustments are made for dividends or other rights if the applicable record date occurs before your stock certificate is issued, except as described in the Plan. ADJUSTMENTS In the event of a stock split, a stock dividend or a similar change in the Common Shares, the number of Common Shares covered by this Option and the Exercise Price per share may be adjusted pursuant to the Plan. Your Option shall be subject to the terms of the agreement of merger, liquidation or reorganization in the event the Company is subject to such corporate activity. -7- 33 LEGENDS All certificates representing the Shares issued upon exercise of this Option shall, where applicable, have endorsed thereon the following legends: THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER AND OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR HIS OR HER PREDECESSOR IN INTEREST. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE FURNISHED UPON WRITTEN REQUEST TO THE SECRETARY OF THE COMPANY BY THE HOLDER OF RECORD OF THE SHARES REPRESENTED BY THIS CERTIFICATE. APPLICABLE LAW This Agreement will be interpreted and enforced under the laws of the State of Delaware (without regard to their choice of law provisions). THE PLAN AND OTHER The text of the Plan is incorporated in this AGREEMENTS Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. BY SIGNING THE COVER SHEET OF THIS AGREEMENT, YOU AGREE TO ALL OF THE TERMS AND CONDITIONS DESCRIBED ABOVE AND IN THE PLAN. -8- EX-11.1 8 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE 1 Exhibit 11.1 Network Solutions, Inc. Computation of Net Income Per Common and Common Equivalent Share
YEAR ENDED THREE MONTHS ENDED DECEMBER 31, MARCH 31, 1996 1996 1997 ------------------ ------------------ ------------------ Weighted average common shares outstanding 12,500,000 12,500,000 12,500,000 ------------------ ------------------ ------------------ Common stock options, as if converted(1) Dividend to SAIC (2) ------------------ ------------------ ------------------ Total common equivalent shares ------------------ ------------------ ------------------ Pro forma common and common equivalent shares ================== ================== ================== Pro forma Net income $ (1,625,000) $ (1,103,000) $ 516,000 ================== ================== ================== Pro forma Net income per common and common equivalent share $ $ $ ================== ================== ==================
(1) Common stock options, as if converted issued at prices below the public offering price during the 12 months immediately preceding the filing of this intitial Registration Statement and through the effective date of such Registration Statement have been calculated using the treasury stock method based upon the estimated initial public offering price and have been included in all years regardless of whether they are dilutive. (2) EX-27.1 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER 31, 1996 FINANCIAL STATEMENTS 1,000 YEAR 3-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 MAR-31-1997 15,540 12,483 0 0 32,430 26,260 (15,439) (13,464) 0 0 56,603 56,940 5,146 6,443 (2,880) (3,063) 66,118 66,850 55,241 52,303 0 0 0 0 0 0 12 12 1,425 1,941 66,118 66,850 0 0 18,862 8,655 0 0 14,666 5,294 6,464 2,463 3,597 2,163 0 0 (2,268) 898 (643) 382 (1,625) 516 0 0 0 0 0 0 (1,625) 516 0 0 0 0
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